Sentiment Steadies As Event Risk Deluge Begins

WHERE WE STAND – Sentiment was somewhat steadier yesterday, as Monday’s panic over DeepSeek’s potential AI shake-up gave way to much calmer heads, ahead of a jam-packed 48 hours which now lies in wait for market participants.

While the turnaround in stocks did seem somewhat fragile at first, equity bulls increasingly gained the upper hand as the day progressed, with dip buyers emerging en masse. I must admit that the conviction behind the rebound surprised me, particularly given the plethora of event risk that lies ahead over the coming couple of days.

Of course, that packed calendar includes the first FOMC decision of the year, as well as earnings from four of the ‘magnificent seven’. Perhaps, we will instead see risk exposure trimmed during today’s session, before J-Pow steps up to the mic in Washington DC, as participants brace for what could be a bumpy ride ahead.

Interestingly, equity participants also largely shrugged off a renewed round of tariff headlines, despite uncertainty on the trade front showing no sign of fading, as the rumoured imposition of 25% tariffs on Canadian and Mexican imports into the US on Saturday continues to inch closer. Focus also continues to fall on the potential for ‘universal’ tariffs, with Treasury Secretary Bessent said to be favouring an initial 2.5% rate, which would increase month-by-month, while President Trump reportedly wants a “much bigger” tariff.

The nub of all this is that policy uncertainty remains extremely high, and that it is tough to sit in short USD positions for any length of time so long as these tariff threats continue to dangle over the market. While equity participants may have reduced the tariff conversation to background noise, the matter remains an important driver of the FX space.

Unsurprisingly, the buck traded a touch firmer yesterday, as the DXY rebounded back towards the 108 figure. I still find it tough to bet against the greenback right now, even setting aside the tariff issue, and basing that bull case in the continued outperformance of the US economy, and relatively more hawkish stance taken by the FOMC, compared to G10 peers.

Speaking of that, UK PM Starmer gave remarks yesterday, and spend most of the speech waffling about “growth” – how it is ‘hardwired’ into decision-making, how it is the Government’s top priority, and how it will help the economy to turnaround. Unfortunately for Starmer, actually engineering growth will take more than endlessly repeating the word and hoping for the best. Tax cuts, deregulation, investment in technology, better infrastructure, and much else besides, is needed to actually deliver some positive economic momentum. Let’s hope Chancellor Reeves puts some ‘meat on the bones’ of this rhetoric in her own remarks today.  

LOOK AHEAD – Well, here we go then, a whirlwind couple of days lies ahead for market participants.

Naturally, today, attention will fall firstly on this evening’s FOMC decision, Powell & Co’s first of the year, where policymakers will likely vote unanimously in favour of holding the target range for the fed funds rate steady, at 4.25% - 4.50%.

The key question participants will be seeking to answer is whether this ‘skip’ will in fact turn into a more prolonged ‘pause’ in the easing cycle, by virtue of the resilient US labour market, and bumpy disinflationary process. Chair Powell is unlikely to offer firm guidance on that front, instead sticking to a data-dependent stance which will see policymakers, between now and March, digest not only incoming datapoints, but also assess the impacts of last year’s policy easing, and the early policies implemented by the new Trump Administration.

Besides the FOMC, today is likely to bring 25bp cuts from each of the Riksbank, and the Bank of Canada. Focus around each decision will centre on whether the end of the respective easing cycles may be near and, if so, whether the pace of cuts may soon slow.

Away from those policy decisions, and after the FOMC is done & dusted, corporate earnings become the ‘main event’. Today brings results from three of the ‘Magnificent Seven’ – Tesla, Meta, and Microsoft – with recent developments surrounding DeepSeek highly unlikely to have impacted earnings just yet, though will likely make for some awkwardness on the earnings calls. A solid slate of Mag 7 earnings could be the catalyst that equity bulls are seeking to further calm recent nerves, and engineer a more convincing recovery in risk assets.