Market Volatility Low as Fed Keeps Rates Unchanged, Trade War Looms

QCP Capital has highlighted several factors contributing to the current low market volatility. The Federal Reserve's decision to keep the benchmark interest rate unchanged was widely anticipated, but the policy committee maintained a hawkish stance. They emphasized that short-term inflation expectations remain high and listed tariffs as a key upside risk. Officials reiterated a preference for a wait-and-see strategy to await further clarity on the inflation path.

The market's sensitivity to geopolitical headlines, including ongoing tensions in the Middle East, continues to decline. This reduced sensitivity is one of the factors contributing to the current low market volatility.

The countdown to the restart of the trade war has begun. As the July 9th deadline for the EU tariff suspension approaches, the U.S. has only reached one agreement among nearly 195 potential trading partners. Negotiations are at an impasse, with leaked information becoming a recurring theme. The market's response to incremental tariff news is becoming increasingly muted.

Several key dates remain crucial in the coming months. On July 14th, the EU plans retaliatory tariffs against the U.S. On August 12th, the 90-day U.S.-China tariff truce is set to end. On August 31st, China's long-term tariff exemption for imported goods will expire. These dates may trigger temporary downside volatility in risk assets.

Despite these potential volatility triggers, QCP Capital's base scenario remains optimistic. Given the intersecting interests of both parties, the U.S.-China trade negotiations are more likely to lead to a stable resolution. This resolution could provide support for continued upside in risk assets. Currently, the market's risk reversal indicator maintains a negative value, reflecting a cautious market stance and expectations of a short-term pullback.