Recent market trends indicate a shift towards a slightly aggressive stance as trade uncertainty lessens. Expectations for central bank rate changes by the end of the year are as follows: – **Federal Reserve**: Expected to cut rates by 43 basis points, with a 97% chance of no change at the next meeting. – **European Central Bank (ECB)**: Projected to cut by 16 basis points, with an 86% likelihood of holding steady. – **Bank of England (BoE)**: Anticipates a 47 basis point reduction, with an 82% chance of a rate cut soon. – **Bank of Canada**: Forecasts a 12 basis point cut, with a strong chance of no change. – **Reserve Bank of Australia**: Expects a 56 basis point cut, with an 87% probability of a cut at the next meeting. – **Reserve Bank of New Zealand**: Planning for a 35 basis point decrease. – **Swiss National Bank**: Facing a 7 basis point cut. – **Bank of Japan**: Expected to raise rates by 22 basis points but likely to hold steady at their next meeting.

Impact of Trade De-escalation

The easing of trade tensions and expansionary policies have helped mitigate tariff effects, likely supporting this trend. However, reduced momentum may occur as current market realities set in, necessitating new drivers. There could be vulnerabilities in the market if positions in risk assets become too stretched. Dellamotta points out that betting against a recession is not as straightforward as before. With the S&P 500 reaching record highs over 5,400 in June 2024, it’s evident that the easing of trade tensions is already reflected in asset prices. Future growth will need specific triggers, rather than just general optimism. The path ahead appears more complicated, especially concerning the Federal Reserve. Although the market expects rate cuts, the latest US Consumer Price Index data for May showed inflation at 3.3%—cooling but still above the 2% target. For derivative traders, this means preparing for uncertainty around when the Fed will act instead of betting on a guaranteed cut.

Shifting Monetary Policies

Central banks are already changing their approaches. Both the Bank of Canada and the ECB cut their key interest rates by 25 basis points in early June 2024. In contrast, the BoE kept its rate steady at 5.25% during its June meeting, despite high expectations for a cut. This divergence opens up opportunities in currency pairs and cross-market trades since monetary policies are not aligned. Due to the stretched positioning in risk assets, traders might want to implement strategies that benefit from increased volatility. Given the fragility of the market, any unexpected negative growth could lead to sharp sell-offs. Therefore, long volatility positions through options could be profitable. For example, buying straddles or strangles on major indices might provide protection and profit potential from sudden market moves in either direction. Historically, markets often rise on the expectation of rate cuts but can become choppy or even drop when cuts actually happen, confirming underlying economic weakness. We have observed this pattern in previous easing cycles, where the first cut marked a short-term peak for stocks before a consolidation phase. Thus, it is wise to be cautious about chasing rallies and be ready for a more complex, two-sided market in the upcoming weeks. Create your live VT Markets account and start trading now.

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