Recall back in the middle of April, Fed's Waller outlined his strategy to deal with tariffs. He had two scenarios in mind: tariffs around 25% on average and tariffs around 10%. The second scenario is the one that is playing out and it involves the Fed being less inclined to cut rates faster.
The problem here is that with new information throughout the weeks, the 10% has become a "meh" outcome. After April 9 pause, the market rallied on expectations that eventually the US would have gone for 10% reciprocal tariffs and would have lowered the tariffs on China back to the original 50-60% rate. This is what the whole "de-escalation trade" was based on.
All of this should now be priced in and the market's reaction to the news of the US lowering tariffs on China could be a hint. In fact, you would have expected a strong rally, but the market actually went in the opposite way. Nonetheless, this has opened up for a weekend risk scenario in which the market opens up with a positive gap next week, so the selling pressure into the weekend could be limited (I mean it doesn't look good from a risk management perspective for the bears).
Next week will be the tell. If we open up with a positive gap and the stock market then performs badly throughout the week, then it could be a signal that we have indeed reached the peak (at least in the short term). I would expect the bears to seize the opportunity and start selling at the start of the week. You either catch the top or you get it wrong, but from a risk/reward perspective it doesn't look bad at all.
This article was written by Giuseppe Dellamotta at www.forexlive.com. Read More Details
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