Markets torn between soft landing narrative and risk-aversion

Market sentiment is swinging wildly this week, reflecting a clash of narratives that has left investors struggling to find direction – by Daniela Hathorn, Senior Market Analyst, Capital.com

On one hand, optimism over the end of the U.S. government shutdown has sparked relief rallies, with traders welcoming the removal of a major policy overhang that had dampened confidence and delayed key economic data releases. On the other, renewed concerns about the sustainability of the AI boom and a pushback from Federal Reserve officials against aggressive rate-cut expectations have quickly tempered the mood. The result has been a choppy trading environment where equities, currencies, and commodities are moving more on shifting narratives than on fundamentals.

The U.S. dollar weakened on Thursday despite a risk-averse session unfolding throughout the day. Meanwhile, gold prices failed to extend their recent rally despite the dollar’s softness and lower bond yields, a sign that investors are torn between hedging against uncertainty and reallocating capital into riskier assets. This push-pull dynamic underscores how sentiment has become highly data-dependent. Markets want to believe the soft-landing story, but they remain anxious that the balance between growth and inflation could shift abruptly.

In essence, the current backdrop is one of narrative volatility, where headlines are dictating direction. Investors are vacillating between confidence that monetary policy will soon ease and concern that inflation or overvaluation in key sectors could keep the Fed cautious for longer. Looking ahead, the next moves will hinge on two key drivers: the return of official U.S. macro data, and the tone of upcoming Fed commentary. If upcoming figures confirm that growth and inflation are cooling, risk assets could regain footing and extend their rally. But if the data surprises on the upside or hawkish voices within the Fed grow louder, markets may have to reprice expectations once again, keeping volatility elevated and sentiment fragile.

Nasdaq 100 daily chart

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