The US dollar ended August on a low note, raising concerns about September. The Baker Hughes oil rig count in the US was 412, slightly above the expected 408. The Dallas Fed Trimmed Mean PCE for July dropped to 1.9% from 3.4%. Gold was nearing the upper limit of a four-month range, while the US Core PCE for July matched expectations year-on-year at 2.9%. The Atlanta Fed GDPNow tracker estimated Q3 growth at 3.47%, an increase from the earlier 2.18%. The University of Michigan’s consumer sentiment for August came in at 58.2, a slight decrease from the preliminary 58.6. Canadian GDP fell by 0.1% in June, contrary to forecasts of a 0.1% rise. The S&P 500 and Nasdaq experienced losses, partly due to Nvidia’s decline tied to Alibaba’s new AI chip development in China.

Markets React to Policy Signals

Gold and short-term Treasuries saw gains, while the US dollar and bitcoin dropped as investors turned cautious. Fed’s Daly suggested on LinkedIn that a policy adjustment is due, potentially favoring a rate cut in September to address concerns over a slowing labor market. Upcoming data will impact longer-term trends, especially with Labor Day celebrations on Monday. The Federal Reserve is hinting at an interest rate cut in September, even as Q3 growth predictions rise to 3.47%. This creates a conflict between a cautious Fed and a strong economy. We should consider options to prepare for increased market volatility, as this disconnect may lead to sharp, unpredictable price movements in the weeks ahead. Given the uncertainty, we’re ready for a jump in the CBOE Volatility Index (VIX), which typically averages over 18 during Fed policy changes. The upcoming ADP employment report is a key event, so we are eyeing straddles on the SPY to profit from a significant move in either direction. Buying VIX calls with a September expiry offers direct protection against potential market turbulence.

AI Rivalry and Market Implications

Alibaba’s new AI chip has created a fresh challenge for Nvidia, shaking up the tech sector. This isn’t just a temporary issue; it indicates a lasting competitive threat that will likely keep implied volatility high for semiconductor stocks. We see an opportunity to sell overpriced call options against existing Nvidia shares or use put spreads on the SMH ETF to safeguard against further declines. Gold is pushing against the top of its four-month range, and a Fed rate cut could trigger a breakout. With July’s Core PCE inflation steady at 2.9%, any rate cut would lower real yields, historically beneficial for gold. We plan to buy call options on the GLD ETF in anticipation of new yearly highs. The US dollar is weakening due to the expectation of lower rates, a trend we also observed leading up to the Fed’s last rate-cutting cycle in 2019. We are considering buying put options on the UUP dollar index ETF to take advantage of further declines. Additionally, the short-term Treasury rally can be leveraged through call options on bond ETFs like SHY, as the market prices in the likely September rate cut. Create your live VT Markets account and start trading now.

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