Monthly Market Outlook

In July, it seemed like all hell let loose in the markets. The month began with an assassination attempt on Trump and ended with Israel hitting three capitals in 12 hours, causing havoc in the Middle East. At the same time, stock markets experienced shock sales, unemployment trend changed, and Powell gave a soft signal of a possible rate cut in September. 

In August, traders will follow the aftermath of a volatile July. While markets brace for incoming rate cuts, Middle East tensions are at a critical point and could change the whole landscape. 

Macro View 

Geopolitical and political risks were clearly market movers in July. First, Biden’s presidential candidacy came into question after a poor faceoff against Trump. But after the failed assassination attempt on Trump, Biden almost lost any chance of winning the election. The FX market started to trade on a Trump presidency, gold rose to over $2,480, and the dollar index retreated below 104. 

After that, Biden finally gave in to weeks of pressure and endorsed Vice President Harris as the Democratic nominee. Harris quickly gained most of the Democrats’ endorsements and became the official candidate. The successful start of Harris’s campaign instantly showed in the polls, and the gap between Trump and Harris nearly closed. This also ended most of the Trump trade; the dollar index rose to over 104.50, and gold retreated to $2,350. Then the Middle East escalation evolved into something different. 

Netanyahu visited the US in July and received a standing ovation from the US Congress. He then met with Trump and Harris. During the US visit, a Hezbollah rocket killed many children in Israel. Netanyahu returned to Israel after the attack, and escalation was expected. Israel hit Beirut, killing a top-ranking Hezbollah commander, but the real surprise was within 12 hours when Israel hit both Damascus and Tehran as well, killing the chief of Hamas in the capital of Iran, reportedly without US knowledge. This is a huge gamble for Israel and the whole Middle East. Iran will surely respond, and this time it might not be for show like the last time. The response of Iran and the counter-response of Israel can change the whole outlook of forex, stock, bond, and crypto markets in the coming weeks. If Iran’s response is similar to the last time, the effects will be almost temporary, with possible spikes in precious metals and a crypto retreat followed by a counter move. But if the escalation steps up to another level, gold might break its current horizontal trend and reach new highs, stocks may finally feel the pressure from risks, and rising energy prices might put central banks’ inflation fight in a difficult position. 

Economic activity shows signs of slowing around the globe. After the fast recovery in the Eurozone that started to show in second-quarter GDP revisions, PMI fell to 50.1, indicating no further economic recovery. The ECB started to cut rates, but the effects of that are months away. China is also growing very modestly, and the PMI trend is not very bright, triggering a small rate cut by the central bank. The UK’s activity growth seems the most stable since the third quarter of 2023. The latest GDP and employment data showed steady growth. The composite PMI of the US reached 55, but ISM may be more suited to look at. Normally, ISM and PMI go hand in hand, but lately, there is a divergence. ISM manufacturing and services seem to be struggling, both below 50 and falling rapidly, in line with the overall slowdown of the economy. 

US inflation is retreating towards the Fed’s target. As Powell describes it, the confidence in inflation falling towards the target has increased over the past couple of months. The US monthly CPI fell to its lowest level since the 2020 COVID-19 shock, reaching negative territory for the first time, excluding the slight breach in 2022. 

However, there is smoke on the horizon, and it is not a good sign. While the Fed aimed to rebalance the supply-demand jobs market, it might be getting out of hand. Unemployment jumped in a concerningly fast manner in recent months, reaching 4.3%. Although this is still very low, the pace of the increase is worrying. Just before the 2001 and 2008 recessions, after the federal funds rate plateaued at its peak, unemployment jumped similarly, signaling an incoming recession. Now, in a similar way, unemployment has jumped rapidly. The Sahm rule also triggered by passing the 0.50 barrier, which has correctly signaled almost all recessions in US history. 

Stock markets are in correction mode. Political and geopolitical risks affect the market, but these are not too deceiving. The real pain came from earnings, sentiment correction, and recession fears. The first jitters started with ASML earnings, then slowly the overly optimistic AI sentiment began to normalize bit by bit. Then Friday’s jobs report put the final nail in the coffin by triggering hard landing fears once again. Markets fell on rising volume, retreating past 11% in almost a half-month period. 

But is this going to be a buying opportunity because of the looming rate cuts? This will be a difficult question to answer. In the 2001 and 2008 recessions, markets fell for months despite fast-paced rate cuts, reaching an average negative return of 47% after the rate cuts started. Of course, this is a different time. There is much more liquidity in the markets, and the economy is still too strong for early recession signals. Bulls might want to take advantage of the recent selloff to buy the dip, at least for the short term. 

But the markets are still in panic mode. In the swap market, traders are pricing in 4 or 5 rate cuts from the Fed, which is almost impossible unless a recession comes with a big crash. Expectations will probably start to normalize next week with some soothing Fedspeak. 

The rate cut expectation is not only for the US. Swap markets are pricing in 3 cuts from the ECB and Bank of Canada, and 2 from the Bank of England. The only exception is Japan. The BOJ went for a rate hike, which was somewhat of a surprise in July. This reverse trend might help USDJPY find more footing after a couple of years long surge. 

Central Bank Meeting Calendar 

Technical View 

The US 10-year government bond yield broke the uptrend and is falling towards the longer timeframe trendline. The recent retreat came with ballooning rate cut expectations but will probably stabilize within the red trend channel with softer moves. The short-term outlook is looking negative for yields, meaning any sharp upward moves might create opportunities for going long on bonds unless the red trend channel ends. 

Brent is still ranging horizontally, but recently the volatility within the flat zone has increased considerably. Rising tensions in the Middle East have certainly had a positive effect, but recession fears have so far outweighed the geopolitical risks, pushing Brent to the key 75-76.50 zone. If this support holds and fears normalize, Brent might start to recover. However, a break below this level could push Brent to the 72 support once more. 

Precious metals diverged in July. Platinum and palladium felt the impact of the slow manufacturing sector, and even silver joined them in reflecting hard landing fears. Gold, however, benefited from recession concerns, geopolitical and political risks, and the prospect of rate cuts on the horizon. 

Gold experienced high volatility in July. News related to the US elections, the assassination attempt on Trump, cooling central bank gold demand, resurfacing ETF demand, China’s rate cut, and incoming rate cuts from the Fed have kept traders on edge. The current almost flat trend channel (yellow) is still ongoing but is being tested aggressively. The 2470-2480 zone remains a significant resistance level. Gold might surge depending on the Iranian response, but the intensity of that response will be crucial. If the response is similar to previous instances—more a show of force than a decisive action—any upward moves might be short-lived spikes. However, if the response is more decisive, gold’s trend might gain a steeper slope, potentially moving towards 2520. For downward moves, 2400 and 2370 are key support levels to watch in the first half of August. 

Silver diverged negatively from gold due to recession fears and declining manufacturing PMIs. As a more industrial metal, silver is significantly affected by the slow manufacturing sector. The downward moves have remained limited, staying around the midpoint of the recent surge. The 27.25 level is the main support for now and is a strong one. If gold continues to rise above 2500, silver might also move above 30. However, the negative divergence could extend into August as well. 

The dollar index has been moving flat between 101 and 107 since late 2022. However, since the start of 2024, an uptrend channel formed from the 101 support. This trend channel ended in July. After that, the 104 support managed to hold against downward pressure, but following Friday’s weak jobs data, this support also failed. The dollar might move towards 101, but if so, the retreat will take time. The 102.86 level, being the 61.8% retracement level, might provide some support, while 104 could act as resistance in the coming days. 

The stock markets had modest gains in the first half of July, but after the ASML earnings report, traders began rotating from overpriced tech stocks to cheaper sectors. However, the rotation turned into panic at the end of the month, with hard landing fears once again taking root in market sentiment. The Nasdaq was hit the hardest with a negative 7.62% return, followed by the S&P 500 with a negative 3.39% return. The Dow Jones Industrial Average managed to hold in positive territory despite losing most of its gains in the latest market rout. 

The VIX index broke the wedge formation with a massive spike. This move provided early signs of trouble in the second half of July, and the break came hard as US stocks took heavy hits. The levels to watch are 30 and 18, which could indicate either a collapse of the S&P 500 or potential dip-buying opportunities. 

The Equal Weight/S&P 500 Index ratio reacted in July as predicted in the last monthly report. The expected rotation brought some downward pressure due to the high weighting of tech giants but some big and medium caps on the positive side. The downward moves in recent months resemble recession pricing, but they occurred earlier. The 1.22 level remains a major point to watch following the stock rotation. 

The massive rally of the S&P 500 from November is now over, and the trend has broken. The 23.6% retracement level at 2345 has held the sharp selloff so far. It is a strong support, but the downside pressure might be enough for it to break. In that case, panic might continue to the 2150 support. However, if there is a dip-buying reaction, 2550 is the resistance to watch. The uptrend is over now; the next trend’s direction might point more southward. 

In June, the dollar index broke the uptrend and fell rapidly. Other currencies benefited from the gains, but the biggest winner was the yen, with a whopping 8.24% return. The CHF also positively diverged, aided by risk pricing. 

EURUSD retreated to the 1.08 support in the second half of July, but in the first two days of August, it recovered almost all of the loss and is now above 1.09. The main resistance is at 1.10, and the main support is at 1.07. Unless one of these levels breaks, the slightly positive trend may continue. 

USDJPY is about to end the trend that started in early 2023. The change in the US and Japanese economic outlook is significant. USDJPY had been rising due to the difference in yields. However, with the BOJ slowing QE and raising rates while the Fed is getting closer to cutting rates, the USDJPY trend is also changing. On Friday, both the 150 and 148.70 support levels were broken. Now, the 150-152 zone may start to act as resistance. For downward moves, the 144.60 – 140.50 level can be watched as possible supports.