As we step into July, the global financial landscape is set for a tumultuous ride, with key political events, crucial economic data releases, and significant speeches by central bank leaders likely to drive market volatility. Elections in France and the UK, coupled with a busy U.S. data schedule and high-profile speeches from Federal Reserve Chair Jerome Powell and European Central Bank President Christine Lagarde, will be pivotal in shaping market sentiments. This article delves into the key events, market outlooks, strengths, risks, and the overall performance of global markets, providing a detailed synthesis of the upcoming week’s financial dynamics.
Political Landscape
France and the UK Elections
The first round of France’s legislative election is anticipated to create market volatility, with a potential swing to the left possibly unsettling investors. The far-right National Rally party’s performance will be closely monitored, with the final outcome dependent on intricate negotiations and alliances before the July 7 runoff. A balanced government could mitigate extreme market reactions, but the uncertainty surrounding the elections is likely to keep investors cautious.
In the UK, the general election on Thursday is expected to see the opposition Labour Party winning, as they lead by approximately 20 points in the polls. Market reactions to a Labour government are expected to be muted, as the outcome appears to be largely priced in. However, the political shift could influence UK asset prices, particularly if it introduces new economic policies or shifts in fiscal strategy.
Economic Data Highlights
United States
The U.S. economic data calendar is packed, starting with the ISM manufacturing PMI on Monday, followed by JOLTS job openings on Tuesday, ADP employment, factory orders, ISM services PMI, and the June 11-12 Fed meeting minutes on Wednesday. With Thursday being a holiday, the week’s highlight will be the non-farm payrolls data on Friday, with a Reuters poll predicting 195,000 jobs created in June and an unemployment rate holding steady at 4%.
Market participants will closely watch these data releases to gauge the health of the U.S. economy and the potential trajectory of Federal Reserve policy. Recent PCE data showed inflation slowing, but personal income growth outpaced expectations, suggesting a mixed economic picture that could influence Fed decisions.
Europe
Europe’s data highlights include final June PMIs, flash HICP, May unemployment and retail sales, German CPI, and industrial production. These indicators will provide insights into the Eurozone’s economic health amid ongoing political uncertainty and inflation concerns.
Japan and China
Japan’s Q2 Tankan survey is the main economic release, with the focus on potential FX intervention as USD/JPY trades above 160.00. China’s June Caixin manufacturing and services PMIs will be scrutinized following weak official NBS readings, with factory activity expected to slow slightly.
Australia and Canada
The Reserve Bank of Australia’s June meeting minutes will be critical, especially after recent data showed consumer prices jumping to a six-month high in May. Retail sales and trade data will also be significant. In Canada, trade, unemployment, and PMIs will be in focus, along with business confidence data from New Zealand.
Market Briefs and Sentiments
U.S. Dollar and Inflation Data
The U.S. dollar softened after recent PCE data showed inflation slowing, yet personal income growth accelerated more than expected. The Chicago PMI showed an unexpectedly robust recovery, while the University of Michigan consumer sentiment posted a forecast-beating rise, suggesting mixed signals for the economy.
Fed officials, including Mary Daly and Michelle Bowman, provided nuanced views on monetary policy, indicating a gradual approach to rate hikes and a focus on cooling inflation. Treasury yields firmed off their lows, and equity markets remained resilient, reflecting cautious optimism.
Euro and French Elections
EUR/USD saw fluctuations driven by U.S. yield movements and election uncertainties in France. The euro’s performance will hinge on the election outcomes and their implications for fiscal policies and economic stability in the Eurozone. German-U.S. yield spreads have tightened, but election-related uncertainties may keep the euro under pressure.
Yen and Potential Intervention
USD/JPY’s break above 161 was brief, with the pair remaining buoyant despite verbal interventions from Japanese officials. The risk of currency intervention looms, especially if the yen’s depreciation continues. The Bank of Japan’s Deputy Governor highlighted the weak yen’s impact on prices, suggesting close monitoring of monetary policy.
Sterling and UK Elections
Sterling’s performance was influenced by mixed economic data and political developments. The pound steadied after initial gains post-PCE data, with the upcoming UK election providing a backdrop for potential market movements. The Labour Party’s lead in the polls suggests stability, but market participants will remain vigilant.
Australian Dollar and RBA
AUD/USD showed resilience, supported by the Reserve Bank of Australia’s hawkish stance. Higher domestic inflation and strong economic data will likely keep the Aussie supported, despite global uncertainties and China’s economic slowdown.
Commodities and Risk Sentiments
Oil and Gold
Oil prices rose, driven by peak summer consumption and OPEC+ production cuts, although gains were tempered by rising output from other producers. Brent crude and WTI saw gains, supported by solid demand indicators and geopolitical concerns.
Gold prices held steady, buoyed by easing inflation data in the U.S. and hopes for Federal Reserve rate cuts. The precious metal’s performance will be closely tied to central bank policies and global economic stability.
Emerging Markets and Currencies
Emerging market currencies are under pressure, with many reaching record lows against the dollar. Central banks in these regions face challenges in stabilizing their currencies without resorting to drastic interest rate hikes, which could hurt economic growth.
Summary of Asset Class Performance
Equities
- U.S. Stocks: The S&P 500 edged up by 0.1%, continuing its resilient performance despite mixed economic data. The index hit a record high earlier in the week but faced slight retreat towards the end. Positive consumer sentiment and robust Chicago PMI data provided support, although inflation concerns and Fed policy uncertainty kept gains in check.
- European Stocks: European stocks, particularly the Euro Stoxx 50, showed resilience amidst election uncertainties in France. The market responded positively to initial election results, indicating hopes for a balanced government. The French CAC 40 is expected to open higher this week, driven by election relief and positive sentiment.
- UK Stocks: The FTSE 100 recorded a decent performance, supported by expectations of a Labour victory in the upcoming election. The index has been relatively stable, reflecting investor confidence in the political transition.
- Asian Stocks: Japanese stocks showed mixed performance, with the Nikkei impacted by potential FX intervention concerns. Chinese and Hong Kong stocks rose slightly, buoyed by manufacturing PMI data, though underlying economic concerns persisted.
Currencies
- U.S. Dollar (USD): The dollar softened slightly after PCE inflation data met expectations. Despite this, personal income growth provided some support. The greenback remained strong against the yen but showed mixed performance against other major currencies.
- Euro (EUR): The euro experienced fluctuations, driven by U.S. yield movements and French election uncertainties. Initial gains were seen post-election results, but the currency remained cautious amid ongoing political developments.
- Japanese Yen (JPY): The yen hit a multi-decade low against the dollar, with USD/JPY briefly breaking above 161. Concerns over potential FX intervention and the Bank of Japan’s monetary policy stance influenced the currency’s performance.
- British Pound (GBP): Sterling steadied after initial gains, supported by expectations of a Labour victory in the upcoming election. Mixed economic data and political stability contributed to its performance.
- Australian Dollar (AUD): The Aussie showed resilience, supported by hawkish RBA expectations and robust domestic economic data. The currency benefited from a weaker U.S. dollar and positive risk sentiment.
Commodities
- Oil: Brent crude and WTI both saw gains, driven by expected peak summer consumption and OPEC+ production cuts. Brent settled above $85 a barrel, with supply deficits anticipated in the third quarter. Rising geopolitical concerns and potential hurricane impacts also supported prices.
- Gold: Gold prices held steady, supported by data showing easing U.S. inflation and hopes for Federal Reserve rate cuts. The precious metal posted its third consecutive quarterly gain, reflecting its safe-haven appeal amid economic uncertainties.
- Copper: Copper prices rose by 1.18%, buoyed by expectations of supportive Fed policies and strong demand indicators. The metal found support after failing to break below key technical levels.
Bonds
- U.S. Treasuries: Treasury yields remained relatively steady at the front end, with longer maturities rising by 2-7 basis points. The yield movements were influenced by mixed economic data and Fed policy expectations.
- European Bonds: German-U.S. yield spreads tightened, reflecting investor caution amid French election uncertainties. The ECB’s stance on inflation and monetary policy also influenced bond performance.
- Japanese Bonds: JGB yields remained near recent highs, with the 10-year yield at 1.075%. The potential for FX intervention and BOJ policy adjustments were key factors impacting Japanese bond markets.
Emerging Markets
- Currencies: Emerging market currencies faced significant pressure, with many nearing record lows against the dollar. Central banks in these regions struggled to stabilize their currencies without resorting to drastic interest rate hikes.
- Equities: Emerging market equities showed mixed performance, with some regions benefiting from improved global risk sentiment, while others remained under pressure due to economic and political uncertainties.
Overall, the performance of various asset classes reflected a balance between cautious optimism and underlying uncertainties. Equities showed resilience, particularly in developed markets, while currencies and commodities experienced mixed movements influenced by economic data, political developments, and central bank policies. Bond markets remained steady, with yield movements reflecting investor sentiment and expectations. Emerging markets faced challenges, particularly in currency stability, highlighting the complex dynamics at play in the global financial landscape.
The upcoming week promises a dynamic and potentially volatile environment for global markets. Political events in France and the UK, alongside key economic data from the U.S., Europe, Japan, and China, will be pivotal in shaping market sentiments. Central bank communications, particularly from the Federal Reserve and the European Central Bank, will be closely watched for clues on future monetary policies.
Investors should brace for a mix of risk-on and risk-off sentiments, driven by geopolitical developments, economic indicators, and central bank actions. With markets finely balanced between cautious optimism and underlying uncertainties, strategic positioning and vigilance will be crucial for navigating the complexities of the week ahead.
Disclaimer: This is not an Investment Advice. Investing and trading in currencies involve inherent risks. It’s essential to conduct thorough research and consider your risk tolerance before engaging in any financial activities.
