Weekly Investment View: Real Money Capitulates on EUR Longs as US Recession Watch Intensifies

This Week

• Global Macro – Bilal highlights three key points: weaker US growth trajectory, defence stocks are outperforming, and real money has capitulated on EUR longs.
• US Macro – Dominique sees jobless claims as this week’s key data with a US economic slowdown and potential recession coming into sharper focus.
• US Rates – Antonio has reinstated his long SFRZ5 position as he sees a US economic slowdown and expects further economic headwinds.
• China – Liang maintains his long position in the 10-year CGB (target 1.45%), in addition to going long USD/CNH (target 7.30).
• G10 FX – Ben sees the US-Korea trade deal as another example of why USD will remain pressured under President Trump.
• Commodities – Viresh’s oil market outlook is negative again, with $60 on the front month being a FV into Q4.

Appendix: Trade Table

Bilal Hafeez – Global Macro

1. Narrowing US Growth. Last week’s weak payrolls and final demand GDP data support our view of a weakening US growth trajectory. Another way of looking at US growth is by individual demand component. Here, we find US growth has rotated away from consumption and government spending towards a massive technology equipment and software boom in 2025 H2 (Chart 1). This ties into the renewed technology stock rally. But technology booms tend not to create jobs as last week’s anaemic payrolls report shows.

2. Defence Stocks on Fire. The AI technology narrative is masking an even bigger theme which is that defence stocks are doing even better. Plain vanilla defence stocks have outperformed AI/technology and technology-oriented defence companies have done even better (Chart 2).

3. Real Money Finally Capitulated on Euro. Last week’s early plunge in the euro finally saw real money throw in the towel and start to sell the euro (Chart 3). They had been buying consistently since late May. But they sold before weak US data, so we think they will return to buying. We remain comfortable being short USD.

Chart 1: US Growth Has Narrowed to Technology Sector in 2025

Dominique Dwor-Frecaut – US Macro

This week’s most important data is jobless claims: continuing claims rose in Q2 but have been stable since then. Nevertheless, the Richmond Fed recession indicator, an improved version of Sahm’s rule based on the insured unemployment rate (continuing claims divided by insured workers), has been rising, though it remains well below the recession trigger (Chart 2). A renewed increase in continuing claims this week would add to concerns over labour market downside risks and recession.

Chart 2: Continuing Jobless claims Signal Rising but Still Low Recession Risks

Antonio Del Favero – US Rates

The firing of the Commissioner of the Bureau of Labor Statistics (BLS) following July’s jobs report makes that institution vulnerable to delegitimisation. Going forward, any strong BLS data could be questionable because it may be, at least partially, the result of Trump’s actions. However, if we get weak data despite Trump’s actions, this could mean the data is very weak. Overall, it may make the market’s reaction to economic data harder to predict. Our event monitor will keep forecasting the market’s reaction in FX to important data releases.

We are long SOFR Jun25. Our very ambitious 96.92 target assumes 125bp of cuts in 2025 (two 50bp and one 25bp). While the new revised data (Chart 3) confirms the slowdown we have long forecasted, 125bp of cuts assumes the data will slow way more than it has so far. The recent easing of financial conditions (FCs) could put a floor on economic data. Therefore, we could take profits if the market prices between three and four cuts.

Liang Ding – China

The unexpected surge in commodity prices in response to the government’s effort to curb oversupply raised inflation expectations. However, strong demand-side support is necessary to achieve a sustainable PPI recovery, given the expected economic headwinds in H2. July’s Politburo readout has not confirmed market speculation about new housing market support or fiscal stimulus.

We think policymakers are adopting a wait-and-see approach. In the next two-three months, we will gain clarity on how the new US trade regime impacts external demand, whether the housing market recovery continues and whether the recent rise in M1 growth begins influencing PPI positively. Meanwhile, the PBoC’s easing policy stance and small and medium-sized banks’ high CGB demand are the main supports for CGBs. We maintain our long position in the 10-year CGB and keep our medium-term target of 1.45% unchanged.

Having signed trade agreements with major trade partners, the US will end the global trade frontrunning since H2 2024. China’s cross-border payments may turn negative in Q4 again, similar to H1 2023 and H1 2024 (Chart 4). Near term, we expect domestic exporters’ and households’ increasing FX hoarding to drive USDCNH higher, following the roughly 1% USD appreciation against RMB in July. Also, the ‘sell US’ narrative has lost momentum. We go long USDCNH with a target of 7.30.

Chart 4: Monthly Cross-Border Transactions Via Banks (USD bn)

Ben Ford – G10 FX

South Korea has gone a similar route to Japan, confirming their $350bn investment pledge is a ‘credit guarantee ceiling.’ In Korea’s case, $150bn is allocated to shipbuilding while the remainder goes towards semiconductors, batteries and nuclear energy. We see three key points in the Japan and Korea deals:

1. Expected FDI flows are unlikely to direct USD as they make up a small portion of the balance of payments (BoP). Moreover, they do not reflect a country-wide trend, but rather a dedicated channel of flows (i.e., this is not currently a trend for US FDI inflows).
2. The BoP must balance. Who would have thought. In essence, the US are attempting to cut their current account deficit (trade deficit is smaller + primary deficit will also be smaller) and attract FDI inflows. However, portfolio investments naturally cannot then continue at the same pace. They must weaken. Or the errors on the BoP could become very large, but we know how happy Trump is with statistical ‘errors’.
3. Companies will keep profits abroad. Japan quoted 9/10 profits would be kept abroad, while Korea say profits would likely be reinvested in the US. There are two notable points on this: 1) This aligns with what Japan has done historically, though Korea does this less; 2) The yen is not as undervalued when you realise they reinvest flows, over repatriating them (Chart 5). This means in the USD devaluation narrative, JPY could underperform expectations without repatriation flows. We would not wait for them given investors have looked for them for over a decade!

Chart 5: JPY Near Fairly Valued When

Including Lack of Investment Repatriations

Viresh Kanabar – Commodities

Analysing my array of oil market data, I fail to see the bull case ahead.

1) Balances remain bearish and are worsening into Q4.

2) The US’ tight inventory situation has abated, with our inventories model suggesting a FV for m2/m3 CL spreads of around 60c broadly aligned with market prices. More importantly, the model has trended lower for five successive weeks.

3) Non-OPEC supply is still rising. Despite the bearish US outlook, actuals remain robust at 13.5mn b/d for crude, and 21.0mn b/d including other oils (in May). Brazilian production is now rising sharply again too as their new production field came online (outlined before). Brazilian production is up 0.3mn b/d YoY. Guyana is also showing strength.

4) Positioning is neutral. From May onwards, the bull case was really positioning-driven as the market overpriced near-term weakness. This is no longer the case, leaving ample room for shorts to increase over coming weeks. Brent remains highly correlated with movements in Managed Money positioning.

5) Secondary tariffs are not the same as a GCC war. On a headline basis, Trump’s threats to raise secondary tariffs on countries importing Russian crude has moved markets, but we think this is overblown. First, we think China can replace lost Indian purchases. Second, this is about fewer buyers, not a total supply loss. Third, if supply is lost temporarily, we do not think the Trump administration can tolerate higher prices!

Overall, we think the outlook for oil is negative again, with $60 on front month being a FV into Q4.

Appendix: Trade Table

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