Do you remember last year's big drop? The "risk period" for US stocks has arrived
Deutsche Bank believes that the market has not yet priced in the tariff increase on August 1. Once the tariffs are significantly raised on that day, combined with a poor employment report released on the same day, it will easily reignite concerns about an economic recession, leading to a repeat of last summer's U.S. stock market crash. In the lead-up to August 1, the market will also face tests from the Federal Reserve's decision, the Treasury Department's quarterly refinancing announcement, and the U.S. second-quarter GDP data
As the August 1 tariff deadline approaches, Deutsche Bank warns that last summer's crisis may repeat itself.
Recently, Deutsche Bank macro strategist Henry Allen warned that the market is currently severely underestimating the likelihood of a tariff increase on August 1, which could trigger a violent reaction and lead to market turmoil similar to last summer.
Additionally, if the U.S. employment report released on the same day shows a mild unexpected decline, it could also trigger massive sell-offs. Last year's similar scenario demonstrated that even non-recessionary data could amplify investor anxiety and drive volatility to soar.
The report stated that these factors, combined with high levels of long-term bond yields, could quickly reignite concerns over fiscal policy and shift the market narrative towards recession risks.
During the period from late July to early August last year, the ISM Manufacturing Index fell below all market expectations, and an unexpected jump in the unemployment rate triggered the Sam recession indicator, rapidly raising concerns about a slowdown in the U.S. economy and causing the most severe market turmoil of the year.
The market underestimates the risk of the August 1 tariff increase
According to Xinhua News Agency, after ordering a 90-day extension of the "reciprocal tariff" deferral period until after August 1, U.S. President Trump stated on the 8th that this date "will not change again."
Current market pricing shows that investors have extremely low expectations for a tariff increase on August 1. Polymarket data indicates that investors estimate the probability of the 35% tariff on Canada taking effect at only 27%, and the probability of the 50% tariff on Brazil taking effect at 42%.
Deutsche Bank warns that this means if the tariffs are actually implemented, the market will face a huge shock. Similar to the announcement of the "reciprocal tariff" in early April, market volatility surged to its highest level since the onset of the pandemic.
Employment data may further amplify risks
Last year's experience showed that even a mild miss in employment data could trigger a chain of sell-offs. The employment data released in August last year indicated an increase of 114,000 non-farm jobs, although below the expected 175,000, it did not in itself indicate a recession.
The issue is that this supported the existing narrative of an economic slowdown, particularly with the rising unemployment rate. Combined with the Bank of Japan's interest rate hike that week, it triggered massive unwinding of yen arbitrage trades, leading to severe market adjustments.
Deutsche Bank emphasized that if the tariff increase on August 1 is followed by a poor employment report, investors will quickly reassess economic outlooks, amplifying fears of recession.
Bond yields are already very "fragile"
Currently, the yield on 30-year U.S. Treasury bonds has risen to 4.97%, higher than the 4.52% on April 2.
Deutsche Bank pointed out that this high starting point means that yields only need to rise slightly to enter problematic territory, reigniting concerns over fiscal policy. After the announcement of "reciprocal tariffs" in April this year, the turbulence in the bond market prompted a 90-day extension of tariffs. However, the current high yield levels have reduced the buffer space, and if events trigger a yield spike, it will directly amplify investors' concerns about debt sustainability.
Accumulation of Other Market Risk Events
Next week, the market will also face several key events that will further amplify end-of-month risks. These include the Federal Reserve's decision, the U.S. Treasury's quarterly refinancing announcement, and the U.S. second-quarter GDP data.
The Federal Reserve's policy decision on July 30 is expected to maintain interest rates, with futures pricing indicating only a 7% probability of a rate cut. However, pressure from the White House for the Federal Reserve to cut rates is increasing, and Deutsche Bank has warned that if Chairman Powell's term ends prematurely, it could trigger market volatility.
The U.S. Treasury's quarterly refinancing announcement (QRA) will also be released that week. Last August, the quarterly refinancing announcement triggered a significant sell-off in U.S. Treasuries, and a few days later, Fitch Ratings downgraded the U.S. credit rating.
Although the second-quarter GDP data is a retrospective indicator, if it continues the contraction seen in the first quarter and is combined with weak employment reports, it will exacerbate market tensions.
These events are reminiscent of last year's pattern, when unexpectedly weak manufacturing data was exacerbated by employment reports. Deutsche Bank summarized that if tariff increases resonate with these factors, market sentiment may quickly shift towards risk aversion.
