Market Commentary: Tuesday 2nd July

Risk attitude is positive, talk that China’s central bank may offer a liquidity boost to the market through methods including an RRR cut in the near future are driving the sentiment in Asia. In Europe, European Central Bank President Christine Lagarde signaled that there is not sufficient evidence that inflation threats have passed, feeding expectations that officials will take a break from cutting interest rates this month. The euro is little changed after French election results and now the focus is on the UK Elections.

Domestically political uncertainty weighs on investment flows, but looking at the Vol market compared to previous elections we are at very low levels in both the one week and one month period. Since Truss’ leadership and the sell-off in gilts, prudent fiscal management and dull politics are seen as good for market stability. Shadow Chancellor Reeves has indicated that prudent budget management would also be a key theme if labour wins. The UK public debt/GDP ratio is currently at its largest level since 1961 meaning there is precious little fiscal leeway in the UK. The Labour party has been wooing investors with promises of supply side changes. Both Hunt and Reeves appear to understand the importance of private sector investment if UK growth is to accelerate. The inference is that as long as a Labour majority avoids parliamentary dramas, that UK investment growth should improve, and that GBP can continue its slow recovery. The 200 day moving average sits at 1.2570, buy those dips.

As for the day ahead, we have Eurozone CPI and unemployment, US job openings at 3pm and both Jerome Powell and Christine Lagarde speak at an ECB forum in Portugal.

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