It was another good day for the US stock markets last Friday as the S&P 500 index extended the gains following the positive NFP report and managed to erase the entire drop since “Liberation Day”.
The question now is how much further this rally can go.
The answer revolves around the first trade deal.
We erased all the losses because the market expected de-escalation and eventually much lower tariff rates given the 10% baseline adopted after the pause.
It’s pretty obvious now that the Fed won’t do anything unless the labour market weakens notably and by then it will be already late. So, the ball remains in Trump’s court.
The path of least resistance remains to the upside but we are now at a point where a disappointment could hurt sentiment and trigger another correction to the downside.
We were told that the first trade deal would have been announced by the end of this week. If we don’t get anything, then the market might take it as a disappointment and further gains would start to be questioned.
Judging by the comments from other countries, 10% might now be seen as too high anyway, so higher tariff rates will likely trigger another selloff on expectations of retaliations and more uncertainty. That’s the worst case scenario.
The best case scenario would be 5% or lower rates, in which instance we would have very high chances of seeing the S&P 500 rallying into a new all-time high.
S&P 500 futures 4 hour chart
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