Week of 29 JUNE

Last week saw a general sell-off in tech amid minor geopolitical hiccups, following US inflation coming in hotter than expected, and crude prices trended lower amid a troubled reopening of the Strait of Hormuz. Gold started the week under $4,250 per ounce amid easing geopolitical tensions, briefly falling below $4,000, but it came back towards $4,100 going into Friday after reports that Iran had attacked a ship off the coast of Oman.

A busier economic calendar next week includes a gathering of the chiefs of the world's top central banks in Sintra, Portugal, Eurozone inflation and the early release of US Non-Farm Payrolls due to a holiday.

Week in Review

The main theme of the week was the sell-off in major tech, with the Nasdaq set to decline by more than 5% and all Magnificent 7 stocks underperforming the broader market. The general downward trend stemmed from profit-taking as investors locked in gains from the prior months. SpaceX shares declined, losing all of their post-IPO gains, and OpenAI was reportedly considering delaying its stock launch until next year amid the broader tech decline. Solid earnings from Micron only provided temporary relief. The risk-off sentiment was exacerbated after the US May core PCE price index came in hotter than expected, rising to 4.1%, the highest level since early 2023. The final reading of US Q1 GDP was revised to 2.1% from 1.6%, adding to the stronger-than-expected PMI data and indicating an accelerating US economy. This contrasted with Europe, where PMIs failed to meet expectations, with ECB officials suggesting that the risk of inflation remained for now. The bond reaction was fairly muted, with the odds of a Fed hike by the end of the year staying roughly the same at around 80%. Markets were likely looking at the decline in crude prices that would lower inflationary pressures later in the year. 

Brent rose to $82 on Sunday after Iran said it had closed the Strait of Hormuz again. Traffic slowed briefly but resumed as discussions between the US and Iran in Geneva suggested progress. The incident illustrated the troubled implementation of the accord, as Iran tried to impose controls on the Strait and even fired on a ship transiting under Omani authority later in the week. Brent fell to $72 by the middle of the week, bounced back after the Iranian attack, and then resumed its downward trend, heading towards $70 by the end of the week. That would put it back within its pre-war price range. WTI experienced a similar decline.

UK Prime Minister Kier Starmer announced his resignation, as widely expected, and said he would remain as caretaker until his expected successor, Andy Burnham, takes office by the end of next month. The orderly transition helped support the pound, as markets seemed relieved that the new Prime Minister would maintain the current fiscal rules.

Overall, markets were driven by a risk-off attitude that contributed to a stronger dollar. The yen was weaker, with policymakers allowing the USDJPY to rise towards the 162 handle without intervention.

Biggest Market Movers

• Gold continued its decline amid a more hawkish Fed and risk-off attitude.
• Commodity currencies were the most affected by dollar strength, with the NZD and AUD underperforming. The latter was affected by softer-than-anticipated inflation data that could delay further RBA tightening.
• The euro declined against the dollar following weak economic data, highlighting divergence between the economies.
• Silver fell dramatically amid rising US yields and easing tensions in the Middle East.
• Nasdaq was the worst performer of major indices, breaking below 29K amid broad tech weakness.

Top Events in the Week Ahead

The coming week has a busier economic calendar that might take precedence over geopolitics if the situation in the Middle East continues to improve. Barring a flare-up in the conflict, markets will likely focus on US jobs data as the only remaining impediment to the Fed hiking in the face of higher inflation. The NFP figures will be published a day early as the US goes on holiday on Friday, which could leave markets with less liquidity by the end of the week. Traders will be looking for additional insight on the monetary policy outlook as the heads of major central banks meet at the ECB Forum in Sintra. After becoming the UK's de facto next Prime Minister, Burnham's expected speech on the economy next week could be pivotal for the pound.

US NFP Easing, But Will It Stop the Fed?

Economists are once again expecting a retracement in the jobs market with the early release of NFP figures on Thursday. A softer labour market would give Fed doves an excuse to hold off on rate hikes, but if the data is similar to the prior month, then the dollar could continue to strengthen. The consensus is for 90K jobs added, a substantial reduction from the 172K a month before. The unemployment rate is also projected to jump to 4.5% from 4.3%. Markets are still pricing in around 70% odds of a rate hike in September, but those odds could diminish if the NFP data falls short of expectations, allowing the Nasdaq to rebound from 29K.

Eurozone Inflation Still Rising

Traders will be looking closely at flash June Eurozone CPI data to time when to expect the next ECB rate hike. Currently, markets are pricing in 25 bps of tightening by the end of the year, but if inflation is hotter than expected, this could bring the timing forward. Typically, the market reacts to the release of French and German data, which usually indicate the trend for the whole of the Eurozone, expected on Wednesday. The consensus is for the headline CPI to remain unchanged at 3.2%, but a beat could weaken the euro if the market sees a greater likelihood that the ECB will hike amid growth concerns in the shared economy. The recent rejection at 1.1400 might increase technical momentum to the downside, exposing 1.1300 once again.

Sintra Forum Could Give Monetary Policy Guidance

Major heads of central banks, including Lagarde, Warsh, Bailey and Macklem, will give speeches at the ECB Forum on Central Banking in Sintra (the European equivalent to the Fed's Jackson Hole Symposium). As the geopolitical and pricing-pressure outlook has shifted since the last round of central bank meetings, they could provide key insights into how rates will perform in the second half of the year. Gold might be particularly sensitive, as it has been under pressure from the general trend towards rising rates. But if central bankers hint at a pivot towards neutrality or easing as the Strait of Hormuz resumes normal transit, the yellow metal could rebound, moving further away from $4K.

Other Events and Earnings

Monday has UK mortgage approvals. Tuesday includes RBA minutes and China PMI figures. Japan's Tankan manufacturers' index comes out on Wednesday. For Thursday, Australia's trade balance is expected.

Next week's earnings calendar is fairly light, with notable names reporting, including Nike, Constellation Brands, General Mills, Curry's, Sainsbury's, and Associated British Foods.