Independence Day celebrations on Monday, so all US markets closed in observance. US only had a 4-day week just two weeks ago – makes for an interesting opening on Tuesday following the holiday.
Review of last week’s key action
FTSE Unchanged DOW -383 -1.21% S&P -86 -2.21% NASDQ -479 -4.13% DAX -305 -2.33% NIKKEI -556 -2.1% Hang Seng +140 +0.65%
Equities failed last week to hold on to gains from the previous Friday as concerns persist that central bankers will take whatever measures are necessary to rein in inflation. By the close on Thursday last week, for the end of H1, US equities had had their worst first 6-months since 1970 – over 50 years ago. The likelihood of further losses is likely.
However, some unwelcome news on the economy in the US is having the opposite effect on the markets now. In what was thin trading ahead of the long weekend, equities rallied in the US following a poor ISM Manufacturing report. Not only was the data worse than expectations, but corporate executives also said new orders and employment conditions worsened over the month.
So why did equities rally on the back of this? This poor data suggests that the US economy is at risk of going into recession if this trend continues – if it not already. The poor data has reduced the scale of interest rises from the Fed – or at least what the markets think the Federal Reserve will be doing. So bad news is good news… for now.
The risk-on move on Friday was more apparent in the bond market, where yields fell 13 basis points on the 10-year to 2.88%. Again, in a thin pre-holiday market. So, will the Federal Reserve, the Bank of England and the ECB really react to this worsening economic picture? But if inflation remains stubbornly high then it is difficult to see central bankers supporting their economies whilst inflation runs too hot. All central banks are mandated to maintain price stability. Not raising rates enough to curb runaway inflation will look like a dereliction of duty.
EURUSD -1.3 -1.23% GBPUSD -1.79 -1.45% USDJPY unchanged.
The US dollar rallied last week as traders expect interest rate divergence to be maintained, with parity versus the euro in sight. Sterling remains particularly weak considering the likelihood of more persistent inflation with weakest economic performance within the G7. The Yen continues to attract Hedge fund interest as traders bet that the Bank of Japan will be forced to abandon its unique loose monetary policy in the face of surging inflation. Many hedge funds have tried and failed – maybe this will be the time when the BoJ gives in. If so, then the Yen could catapult higher in this event.
Gold -17 -0.93% UK OIL -1.51 -1.33% US OIL +0.96 +0.88% Bitcoin -1,968 -9.2%
Gold is tracking the US dollar as we all know whilst the Crypto market continues to be under pressures along with equities. The losses sustained across crypto assets now amount to 70% since November or approximately US$2.3tn – compared to the US$9tn wiped off equity valuations.
Data / events for the week ahead
A key week for markets – despite the shortened US week, we have minutes from the previous FOMC meeting on Wednesday and then non-Farm employment data on Friday.
Monday
US US Markets closed in observance of Independence Day.
Switzerland CPI – M/M. Might explain why the Swiss National Bank those to raise rates by 0.5% in their last meeting.
Tuesday
Australia Monetary Policy meeting – Expect another increase in rates – by 0.5%. AUD sensitive.
Wednesday
Eurozone Economic forecasts – annual and 2-year forecasts.
US ISM Services data – Could make interesting reading with a fall from last month. The risk is that it will be worse than the consensus reading.
US FOMC minutes from previous meeting.
Thursday
US ADP Non-farm employment data – delayed by a day. Usually more erratic than the Bureau of Labour reading. A rebound from last month’s reading.
US Fed member Bullard speaking about US economy and monetary policy in Arkansas. USD, equities, Bonds sensitive.
Friday
Eurozone Lagarde speaking at Economic Meetings of Aix-en-Provence.
US Non-Farm employment change. +275K jobs expected. But less than last month. Fed watchers at the ready if data is worse than expected. USD, Equities, Bonds, and commodities all sensitive.
