05.08.202609:41 Forex Analysis & Reviews: Market pre-empts news

Don't count your chickens before they hatch. Wall Street seems to have forgotten that proverb. No sooner had Qatar announced its readiness to propose a plan to unblock the Strait of Hormuz than the S&P 500 and the Dow Jones Industrial Average surged to record highs, and Brent plunged below $80 per barrel. The deal has not been signed yet, but investors have already celebrated its conclusion.

Dynamics of S&P 500, hyperscalers, and hedge fund trades

After a sharp correction, chipmakers delivered their best four-day rally since 2020. At first glance, the move looks like proof that the sell-off in the tech giants and the Magnificent Seven is exhausted. Absolute Strategy Research points to an ETF that tracks Goldman Sachs' hedge-fund positions: its decline and subsequent rebound closely mirrored the performance of hyperscaler stocks. It appears to be less a victory over geopolitics than the unwinding of overly leveraged speculative positions.

Monetary policy helps as well. Inflation expectations have collapsed over the past two months — roughly since Kevin Warsh took the helm of the Fed. An inflation forecast below the 2% target naturally reduces fears of further rate hikes. Wells Fargo notes that reopening the Strait of Hormuz could normalize global oil supplies and relieve short-term pressure on energy prices, thereby easing the inflation puzzle.

Dynamics of US inflation expectations

However, inflation does not normalize overnight. Energy pressure can ease, but broader price indices risk staying sticky, which would limit the potential decline in Treasury yields. Especially since the Fed left interest rates unchanged while an increasing number of officials have started talking about hikes, the war with Iran and the AI investment boom are feeding inflationary risks.

In the labor market, there is a kind of Goldilocks regime for now: job openings fell in June, but hiring ticked up slightly, indicating relatively stable demand for workers. This gives the Fed room to maneuver and allows it to focus on inflation. That said, the Friday jobs report for July could quickly rewrite the script. Strong numbers would strengthen the case for a September rate hike. Weak numbers, combined with last week's disappointing GDP, would give the central bank reason to remain on pause.

Thus, Wall Street's rally currently rests on three pillars at once: rumors of a deal over the Strait of Hormuz, the covering of short positions by overleveraged hedge funds, and faith in the restraint of the new Fed chair. All three supports remain assumptions rather than established facts. Has the market already booked itself an advance too early?

Technically, the daily chart shows that the S&P 500 has resumed its uptrend. The emphasis on buying should be maintained, and the target of 7,870 should be raised to 8,000.