Countdown to the End of the Risk Asset Frenzy: Prepare for a Q3 Pullback

The strong U.S. nonfarm payrolls report reflects solid momentum in the labor market, while the ISM Services PMI shows that the service sector continues to fuel the economic heat. But as more optimistic headlines flood the market, it signals that investor sentiment may have entered irrational exuberance territory—driving risk assets into overvaluation. The bull train keeps accelerating, pushing adrenaline levels higher among investors.

From a macro-cycle perspective, a correction seems inevitable. We believe the U.S. dollar will emerge as the lone outperformer in the near term, as the greenback appears significantly undervalued. The turning point may not be today, but its likely just around the corner.

The following analysis of the July 3rd economic data release supports our constructive outlook on the U.S. dollar.

1. Labor Market Surprise Calms Investor Anxiety

The latest nonfarm payrolls report reignited risk-on sentiment, countering the uncertainty triggered by Trump's proposed tariffs and the Fed's continued restrictive stance. The June jobs report showed a solid gain of 147,000 jobs and an unemployment rate of 4.1%, shifting the economic narrative from pessimism toward neutrality.

(Chart 1: Nonfarm Payrolls & Unemployment Rate | Source: BLS)

Looking back at the June BofA Global Fund Manager Survey, which covered 200 fund managers overseeing $523 billion in AUM, sentiment shifted dramatically. Following tariff announcements, 49% anticipated a hard landing, corresponding with the markets bottom. However, as U.S.-China trade tensions eased, expectations for soft or no landing began to rise—highlighting a sharp change in outlook.

(Chart 2: June FMS – Fund Managers Outlook on U.S. Economy | Source: BofA)

Given the upbeat June employment data, we expect the July FMS to show an even greater proportion of managers projecting a “no landing” scenario—potentially surpassing Januarys 38%.

We previously noted that FOMO-driven rallies are often led by fund managers who are underexposed to U.S. equities. Their need to chase performance contributes to market overextension.

Historical asset allocation data from the past 20 years shows that fund managers exposure to U.S. dollar assets is now 2.5 standard deviations below the historical average—an extreme underweight. U.S. equities are also underweighted by 1.8 standard deviations. This conservative positioning reflects a shift toward defensive assets and foreign markets. As sentiment turns, there's ample room for reallocation back into dollar-denominated assets.

(Chart 3: FMS Fund Managers Asset Allocation Z-Score | Source: BofA)

2. June ISM Services PMI Shows Expansion, but Momentum May Be Peaking

Contrary to manufacturing data, the June ISM Non-Manufacturing Index rebounded to 50.8—signaling a return to expansion. Business activity and new orders surged by 4.2% and 4.9%, respectively, underscoring the service sector's resilience.

(Chart 4: U.S. June ISM Services PMI | Source: ISM Report)

Still, we're cautious. Despite steady jobs data, the PMI and NMI indicators are not improving in tandem—raising doubts about whether the labor market can sustain its current strength. Can we expect similarly robust data next month？

If not, risk assets may already be overbought—a growing concern for investors this month.

The potential reversal in FOMO-driven rallies hinges on a reallocation back to dollar assets by FMS managers. This would trigger a sell-off in non-USD currencies and put pressure on emerging markets and even commodities.

If golds next major downtrend is starting, the likelihood of a meaningful rebound appears slim.

Gold Technical Outlook

Gold has formed a clear bearish engulfing pattern on the daily chart, suggesting downside momentum. Short-term resistance lies at the Fibonacci retracement levels of 3332, 3338, and 3344. Traders may consider entering short positions in tranches. The Fibonacci extension target is 3277, with a stop-loss recommended at 3350—limited to 5–10% of position size.

Support levels: 3311 / 3277

Resistance levels: 3332 / 3338 / 3344

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