As we venture into the 2nd week of July, the global financial landscape is poised for significant shifts, driven by critical political events, key economic data releases, and impactful speeches from central bank leaders. The elections in France and the UK, alongside a packed U.S. economic data schedule and important addresses from Federal Reserve Chair Jerome Powell and European Central Bank President Christine Lagarde, will play crucial roles in influencing market volatility. This analysis explores the essential events, market outlooks, strengths, risks, and overall performance, offering a comprehensive overview of the financial dynamics for the coming week.

Political Events: Elections in France and the UK

France: Legislative Election

The initial round of France’s legislative election is expected to stir market volatility, with a potential leftward shift possibly unsettling investors. The far-right National Rally party’s performance will be closely scrutinized, with the final result hinging on complex negotiations and alliances ahead of the July 7 runoff. A balanced government could temper extreme market reactions, yet the uncertainty surrounding the elections will likely keep investors on edge.

United Kingdom: General Election

The UK’s general election on Thursday is anticipated to result in a victory for the opposition Labour Party, which leads the polls by around 20 points. Market reactions to a Labour government are expected to be subdued, as the outcome appears largely priced in. However, a political shift could impact UK asset prices, particularly if it introduces new economic policies or fiscal strategies.

Key Economic Data Releases

United States

The U.S. economic data calendar is full, starting with the ISM manufacturing PMI on Monday, followed by JOLTS job openings on Tuesday, and ADP employment, factory orders, ISM services PMI, and the June 11-12 Fed meeting minutes on Wednesday. With Thursday being a holiday, the highlight will be the non-farm payrolls data on Friday, with a Reuters poll forecasting 195,000 jobs created in June and an unemployment rate remaining at 4%.

Europe

Europe’s key data includes final June PMIs, flash HICP, May unemployment and retail sales, German CPI, and industrial production. These indicators will shed light on the Eurozone’s economic health amid ongoing political uncertainties and inflation concerns.

Japan and China

Japan’s Q2 Tankan survey is the main economic release, with potential FX intervention as USD/JPY trades above 160.00 being a focus. China’s June Caixin manufacturing and services PMIs will be examined following weak official NBS readings, with a slight slowdown in factory activity expected.

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 slowing inflation, while personal income growth outpaced expectations. The Chicago PMI indicated a robust recovery, and the University of Michigan consumer sentiment rose more than forecast, presenting mixed economic signals that could influence Fed decisions.

Euro and French Elections

EUR/USD experienced fluctuations driven by U.S. yield movements and election uncertainties in France. The euro’s performance will depend on the election outcomes and their implications for fiscal policies and economic stability in the Eurozone.

Yen and Potential Intervention

USD/JPY’s brief rise above 161 reflected underlying strength despite Japanese officials’ verbal interventions. The risk of currency intervention remains, particularly if the yen’s depreciation continues.

Sterling and UK Elections

Sterling’s performance stabilised with expectations of a Labour victory. Mixed economic data and political developments influenced its movements.

Australian Dollar and RBA

AUD/USD showed resilience, supported by the Reserve Bank of Australia’s hawkish stance and strong domestic economic data.

Commodities and Risk Sentiments

Oil and Gold

Oil prices increased, driven by peak summer demand and OPEC+ production cuts. Gold prices remained steady, buoyed by easing U.S. inflation data and hopes for Federal Reserve rate cuts.

Emerging Markets and Currencies

Emerging market currencies faced pressure, with many reaching record lows against the dollar. Central banks in these regions face challenges in stabilising their currencies without drastic interest rate hikes, which could harm economic growth.

Outlook and Conclusion

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.

Summary of Asset Class Performance

Equities

• U.S. Stocks: The S&P 500 edged up by 0.1%, maintaining its resilience despite mixed economic data.
• European Stocks: European stocks, especially the Euro Stoxx 50, showed resilience amid French election uncertainties.
• UK Stocks: The FTSE 100 performed well, reflecting investor confidence in the political transition.
• Asian Stocks: Japanese stocks showed mixed performance, while Chinese and Hong Kong stocks rose slightly.

Currencies

• U.S. Dollar (USD): The dollar softened slightly after PCE inflation data.
• Euro (EUR): The euro fluctuated due to U.S. yield movements and French election uncertainties.
• Japanese Yen (JPY): The yen hit a multi-decade low against the dollar.
• British Pound (GBP): Sterling steadied, supported by expectations of a Labour victory.
• Australian Dollar (AUD): The Aussie showed resilience, supported by robust domestic data.

Commodities

• Oil: Brent crude and WTI both saw gains driven by peak summer demand and OPEC+ production cuts.
• Gold: Gold prices held steady, supported by easing U.S. inflation data and hopes for Fed rate cuts.

Bonds

• U.S. Treasuries: Treasury yields remained steady, influenced by mixed economic data and Fed policy expectations.
• European Bonds: German-U.S. yield spreads tightened amid French election uncertainties.
• Japanese Bonds: JGB yields remained near recent highs, with potential FX intervention in focus.

Emerging Markets

• Currencies: Emerging market currencies faced significant pressure, nearing record lows against the dollar.
• Equities: Emerging market equities showed mixed performance amid global risk sentiments and local economic challenges.

Strategic Insights

Investors should prepare for a mix of risk-on and risk-off sentiments driven by geopolitical developments, economic indicators, and central bank actions. With markets delicately balanced between cautious optimism and underlying uncertainties, strategic positioning and vigilance will be essential for navigating the complexities of the week ahead.

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