Ever since the emergence of the rate-cut narrative and the data-driven approach by central banks, markets have largely opted to take their cues from data releases in an effort to predict central bank policy and the rate-cut trajectory. While it might seem like a logical approach, it has caused volatility in the market as traders and investors alike position and reposition themselves from datapoint to datapoint. This behaviour and the volatility it causes will continue to be the order of the day until such a point that a clear interest rate trajectory can be mapped. Some of these crucial data points include inflation readings, gross domestic product and labour market statistics.
Geopolitical risk remains firmly on the table. The wars in Gaza and Ukraine might be the first to pop into your head when thinking about geopolitical tensions, but the ever-fracturing ties between countries also play a pivotal role. Market participants continue to keep a keen eye on trade relations between China and the Western World, as well as anti-West trade treaties, which are becoming increasingly common.
Chinese economic activity and policies are being closely monitored as market participants remain cautious in the region. Even as it faces headwinds, China remains a major player in global trade and investment. Its large population and growing middle class make it an attractive market for businesses, while companies around the world rely on China for both exports and imports, which impacts supply chains and revenue streams. The continuous animosity between the US and China, China’s perceived friendliness towards contentious countries such as Russia, the recent clampdown on private businesses, and economic headwinds all create a more cautious and uncertain environment.
The upcoming 2024 United States (US) presidential election holds significant implications for global markets. Elections often introduce uncertainty, leading investors to react to potential policy changes, which give rise to increased fluctuations in stock prices, bond yields, and currency values. Different political parties have distinct economic approaches, which can impact market behaviour. The decisions regarding US trade, environmental, fiscal, and foreign policies will also significantly shape the global economic landscape. In addition, the US’s role in global affairs is significant, and the election outcome can influence international trade relations, geopolitical stability, and investor confidence on a global scale. Investors will closely watch the candidates’ positions on these matters in the months ahead.
MARKET RECAP
A confluence of factors is shaping the dynamics of global financial markets. Recent economic data is driving speculation about central bank policies and influencing asset prices across bonds, equities, commodities, and currencies.
US Treasury yields react to surge in jobless claims
The yield on the US 10-year Treasury note experienced volatility this week, initially climbing, but later retreating below 4.5% on Thursday. This fluctuation followed the release of unexpected data indicating a surge in initial jobless claims to a six-month high. The disappointing labour market figures have fuelled expectations of an impending interest rate cut by the US Federal Reserve (Fed), with markets now pricing in a 69% probability of a reduction in September. Despite this, comments from various Fed officials, including Boston Fed President, Susan Collins, suggest a reluctance to lower rates until there is greater confidence in inflation reaching its 2% target. This cautious stance contributed to tepid demand during the Treasury’s Thursday auction of 10-year notes.
In the United Kingdom (UK), the yield on the 10-year Gilt sharply retreated to below 4.15%, marking a one-month low. This downward movement followed dovish signals from the Bank of England (BoE) in its latest policy decision. While the BoE maintained its key interest rate at 5.25%, Governor, Andrew Bailey, and other Monetary Policy Committee members hinted at a potential rate cut. The BoE expressed confidence in inflation nearing its 2% target in the coming months but emphasised a continued restrictive monetary policy stance even in the event of a rate reduction. Market participants responded by increasing bets on a rate cut in the upcoming quarter, with expectations divided between whether the potential cut will be in June or in August.
Equities react to economic data and earnings reports
US stock futures initially faced downward pressure following the increase in jobless claims, signalling softening labour market conditions. However, losses were mitigated, with major indices posting end of day gains of between 0.3% and 0.8%. Meanwhile, ongoing earnings reports contributed to stock-specific movements, with companies such as online rental platform Airbnb down 6.9%, and tech company Arm Holdings down 2.3%.
In Europe, the DAX index in Frankfurt extended its winning streak to reach a fresh record high, while in London the FTSE 100 continued its upward trajectory following signals of potential rate cuts by the BoE. Corporate earnings updates and monetary policy outlooks remain focal points for investors, driving sectoral and individual stock movements.
In Asian markets Japan’s Nikkei 225 index gained 0.4% while the broader Topix index was up 0.5%. Investors grappled with conflicting signals from the Bank of Japan’s policy meeting and data indicating a slowdown in wage growth. Notable stock movements included gains in financial services institution Mitsubishi UFJ and consumer electronics and gaming company Nintendo, while vehicle manufacturers Toyota Motor and Mitsubishi Motor saw declines in their stocks.
Commodity prices react to supply data and geopolitical developments
Commodity markets have been influenced by supply data and geopolitical developments. Brent Crude futures rose toward $84/barrel, supported by a decline in US crude stockpiles and expectations of a US Fed interest rate cut, which could signal the potential for increased energy demand. However, oil prices remained close to two-month lows amid easing geopolitical tensions in the Middle East. Gold prices held steady at around $2,310/ounce as investors awaited US economic data for clues on the timing of potential Fed rate cuts and assessed geopolitical risks.
Currency markets await policy guidance
Currency markets saw the dollar decline following the increase in jobless claims to an 8-month high. Investors are awaiting further guidance on Fed monetary policy amid expectations of easing measures later in the year. The focus is now turning to next week’s inflation data. Meanwhile, the euro remained near one-month highs against the greenback as data from the US continued to underperform expectations.
The pound experienced losses following the BoE’s dovish stance. Governor Bailey indicated a likelihood of rate cuts in the coming quarters to make monetary policy less restrictive. There was a slight increase in traders’ expectations for a rate cut in June, although a 25-basis points reduction in August remains fully priced in. Additionally, policymakers have adjusted their inflation forecast downward while raising the growth outlook.
Key Indicators:
GBPUSD: 1.2522
GBPEUR: 1.1605
GOLD: $2,352.14
BRENT CRUDE: $84.33
Sources: Bloomberg, Reuters News, Refinitiv and Trading Economics.
Written by Citadel Global Director, Bianca Botes
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