Beware 'market turmoil' potential at end of this month

Deutsche Bank's Henry Allen warns of potential market turmoil and a sharp sell-off around late July/early August 2025, echoing last year's turbulence. Key catalysts include the August 1 Donald Trump tariffs deadline, largely unpriced by markets, and the upcoming US Non-Farm Payrolls report, both capable of sparking significant volatility. Compounding this, higher long-duration government bond yields, with US 20- and 30-year Treasuries near 5%, increase the risk that even a modest yield jump could reignite fiscal policy concerns, potentially shifting the market narrative negatively and resurrecting US recession fears rapidly.

Analysis

A confluence of catalysts in late July and early August 2025 presents a significant risk of market turmoil, according to analysis from Deutsche Bank's macro strategist Henry Allen. The primary risk stems from the August 1 deadline for potential tariffs by Donald Trump, an event markets are reportedly underpricing due to a belief that he will not follow through, creating vulnerability to a sharp, negative surprise. This deadline coincides with the release of the US Non-Farm Payrolls report, a historically potent market mover that triggered a sharp sell-off in August 2024 even with only a minor miss. Compounding these event risks is the elevated level of long-duration US Treasury yields, with 20- and 30-year bonds trading near 5.0%, significantly higher than the sub-4.5% levels seen a year prior. This higher starting point means a smaller upward move in yields could breach problematic thresholds, reigniting fears over US fiscal policy and potentially causing a rapid souring of market sentiment toward recession concerns within a 48-hour window.

Key Decisions for Investors

• Consider implementing or increasing portfolio hedges, particularly those focused on equity market volatility, ahead of the late July/early August period to protect against a potential sharp sell-off.
• Investors should closely monitor the outcome of the August 1 tariff decision and the subsequent US jobs report, as a negative result in either, especially in tandem, is the identified catalyst for a severe market reaction.
• Re-evaluate exposure to long-duration fixed income, as the heightened sensitivity of bond yields means a further spike could exacerbate market stress and trigger wider fears about fiscal sustainability.
• Avoid complacency regarding the tariff risk, as the market's current pricing of a benign outcome, dubbed the 'TACO trade', presents an asymmetric risk profile if tariffs are unexpectedly implemented.