As we enter the first week of July, global markets are poised for a potentially volatile period marked by key political events, central bank developments, and crucial economic data releases. The interplay of these factors is likely to shape market sentiment and drive asset prices across various regions.

Political Landscape:

The week kicks off with the aftermath of the first round of French legislative elections, where the far-right National Rally party led by Marine Le Pen secured a significant victory. While this outcome was largely anticipated, it has sparked relief in financial markets, with the euro strengthening and European stock futures pointing to a positive open. The prospect of a hung parliament in France, following potential alliances to block Le Pen's party, could lead to political uncertainty but may also temper fears of radical policy shifts.

In the UK, the upcoming general election on July 4th is expected to result in a Labour Party victory, with polls showing a substantial lead over the Conservative Party. Historically, changes in UK government have been positive for equities, and the FTSE 100 has shown resilience in the first half of 2024. However, investors will be closely monitoring the advancers/decliners ratio for signs of growing risk aversion in UK stocks.

The US political landscape is also garnering attention following the recent presidential debate between Joe Biden and Donald Trump. With calls for Biden to step aside and Trump's lead widening in polls, uncertainty surrounding the upcoming US election is mounting. However, the dominance of US stocks in global markets and the dollar's reserve currency status may mitigate the impact of political shifts on asset prices.

Central Bank Developments:

The release of the FOMC minutes from the June 11-12th meeting will be a focal point for investors seeking insights into the Fed's stance on policy restrictiveness and the likelihood of a September rate cut. Currently, markets are pricing in a 56% probability of a rate reduction in September. Fed Chair Jerome Powell's speech alongside ECB President Christine Lagarde at the ECB Forum on Central Banking in Sintra, Portugal, will be closely watched for any hints on monetary policy direction.

The Bank of Japan (BOJ) faces ongoing challenges with the yen's weakness, as USD/JPY continues to trade near multi-decade highs. While intervention risks remain, the timing of US rate cuts may have a more significant impact on the dollar-yen exchange rate than minor BOJ policy adjustments.

Economic Data:

A slew of economic releases will provide crucial insights into global economic health:

• US Labor Market: The week culminates with the Non-Farm Payrolls report, with expectations of 190,000 jobs added in June, down from 272,000 in May. The unemployment rate is projected to hold steady at 4%, while wage growth is anticipated to moderate. JOLTS job openings data will offer additional perspective on labor market dynamics.
• Manufacturing PMIs: Global manufacturing PMI data will be released, with particular attention on the US ISM Manufacturing PMI. These figures will help gauge the sector's health across major economies.
• China Economic Indicators: Recent PMI data showed a mild contraction in China's manufacturing sector and a slowdown in services growth, raising concerns about the world's second-largest economy. Investors will monitor additional releases for signs of economic stabilization or further weakening.

Market Performance and Outlook:

Global equity markets demonstrated divergent performance in the first half of 2024. While US indices like the S&P 500 and Nasdaq posted strong gains of 14.5% and 18% respectively, European markets lagged. The FTSE 100 rose 4.8% on a currency-adjusted basis, outperforming the French CAC 40, which fell 3.77%.

In the currency markets, the British pound has been the top performer against the US dollar in the G10 space year-to-date, despite a marginal 0.6% decline in GBP/USD. The euro has shown resilience in the face of political uncertainty, while the Japanese yen remains under pressure due to divergent monetary policies.

Bond markets have seen yields rise across major economies, with the UK 10-year Gilt yield increasing by over 60 basis points year-to-date, slightly outpacing the rise in US Treasury yields.

Risk Sentiment and Volatility:

The coming week is likely to see heightened volatility as markets digest political outcomes, central bank communications, and economic data releases. Risk sentiment may fluctuate based on several factors:

• Political uncertainty in France and the UK could drive short-term volatility in European assets.
• US election speculation may impact sentiment towards US equities and the dollar.
• Weaker-than-expected economic data, particularly in the US labor market or Chinese indicators, could fuel risk-off sentiment.
• Hawkish signals from central banks might dampen risk appetite, while dovish tones could boost risk-on sentiment.

Strengths and Risks:

Strengths:

• Resilience of US equity markets and the dollar's reserve currency status.
• Potential for political stability in the UK following the election.
• Signs of moderating inflation in major economies.

Risks:

• Political fragmentation in France and potential policy gridlock.
• Ongoing concerns about China's economic slowdown and its impact on global growth.
• Potential for disappointing US labor market data, which could fuel recession fears.
• Currency market volatility, particularly in USD/JPY, with intervention risks looming.

Summary of Performances for Various Asset Classes:

Equities:

• US Stock Markets:
  • S&P 500: Up 14.5% in the first half of 2024
  • Nasdaq: Gained 18% in H1 2024
  • Strong performance driven by technology and AI-related stocks
• European Stock Markets:
  • FTSE 100 (UK): Rose 4.8% on a currency-adjusted basis in H1 2024
  • CAC 40 (France): Fell 3.77% in H1 2024
  • Eurostoxx 50: Increased by 5% in the first half
• Asian Stock Markets:
  • Chinese and Hong Kong indices: Rose by 1% and 3% respectively in H1 2024
  • Underperformance compared to US and European markets due to economic concerns

Currencies:

• US Dollar:
  • Mixed performance against major currencies
  • Maintaining strength due to its reserve currency status
• British Pound (GBP):
  • Best performer in G10 FX space vs USD year-to-date
  • GBP/USD down 0.6% despite overall strength
• Euro (EUR):
  • Showing resilience despite political uncertainties
  • EUR/USD up 0.33% in recent trading
• Japanese Yen (JPY):
  • Significant weakness, with USD/JPY near multi-decade highs above 160
  • Potential for intervention by Japanese authorities

Fixed Income:

• US Treasuries:
  • 10-year yield up more than 50 basis points year-to-date
• UK Gilts:
  • 10-year yield higher by more than 60 basis points in 2024
• French Government Bonds:
  • 10-year yield up 73 basis points year-to-date

Commodities:

• Gold:
  • Prices held steady, buoyed by inflation data
  • Up more than 4% in Q2 2024
• Oil:
  • Brent Crude: Rose 0.5% to $85.42 per barrel
  • WTI Crude: Up 0.53% to $81.97
  • Both contracts gained about 6% in June
• Industrial Metals:
  • Copper: Rose 1.18% recently, supported by inflation data and technical factors

Overall Asset Class Performance Summary:

• Equities: US markets outperformed global peers, with technology stocks leading gains. European markets showed mixed results, while Asian markets underperformed.
• Currencies: The US dollar maintained its strength, while the British pound showed resilience. The Japanese yen faced significant pressure.
• Fixed Income: Government bond yields rose across major economies, indicating a general decline in bond prices.
• Commodities: Oil and gold showed strength, with oil particularly benefiting from OPEC+ production cuts and seasonal demand.

This diverse performance across asset classes reflects the complex interplay of global economic conditions, political events, and monetary policies. Investors should consider these trends in the context of their overall portfolio strategy and risk tolerance.

In conclusion, the coming week presents a complex interplay of political, economic, and monetary factors that will shape global market dynamics. Investors should remain vigilant and prepared for potential volatility across asset classes. The interplay between political outcomes, central bank communications, and economic data releases will be crucial in determining near-term market direction and risk sentiment. As always, diversification and a focus on long-term fundamentals remain prudent strategies in navigating these uncertain waters.

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