Market Overview
Recession fears dominated headlines last week with renewed fears of a lockdown in China. The Euro almost achieved dollar parity on weaker economic data from Germany and the Eurozone. In contrast, June US employment reports remained resilient last week as job creation remained on highest levels since the Second World War, allowing the Fed to adopt a more hawkish rhetoric. Markets have priced in a further 75 basis rate rise at the Fed policy meeting on 27th July. Most participants expect the Fed to moderate the intensity of the hikes from Sep-Dec 2022, settling on hikes of +25bps instead of +75 bps as US economic data could continue to erode, causing the Fed to alter their single-minded stance on inflation. Weaker global demand and rising interest rates have also resulted in weaker EM currencies and a stronger US Dollar (Bloomberg News, Market Watch).
The assassination of Japan’s longest standing Prime Minister Shinzo Abe has shocked the global community. He was well known for his ‘Abenomics’ policy which focused on generating economic growth via monetary easing and the weakening of the yen. Japan’s upper house elections on Sunday has ruled the reigning Liberal Democratic Party victorious and the new Prime Minister Fumio Kishida will carry on with Abe’s ‘New Capitalism’ policy agenda. Meanwhile, UK’s Prime Minister Boris Johnson stepped down in the wake of 44 resignations in his government. The GBP stabilized following Johnson’s
departure announcement (Reuters, Bloomberg News).
On a corporate level, Elon Musk has decided to abandon his USD 44 trillion purchase of Twitter Inc. which could result in a legal battle unless settled out-of-court (CNBC News). Q2 earnings season starts this week starting with US banks. It makes sense to monitor the strength of loan growth as an indication of the US consumer’s sentiment and resilience.
Commodities, FX and Bonds
The Euro was the week’s largest loser, almost achieving parity with the dollar as Germany announced its first trade deficit since 1991. The energy sector in Europe is also facing a crisis evidenced by France’s decision to nationalize EDF and Germany’s bail out of Uniper (Source: Bloomberg Markets). In response to these challenges, it is expected that the European Central Bank will accelerate its rate hikes to flatten the yield curve and stabilize the Euro starting at its next meeting on 21 July. India’s central bank, RBI allows global trade settlements in INR (RBI website). The move would enable trade with sanctions-hit Russia while promoting growth in foreign reserves.
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