Market Commentary: Tuesday 9th July

Continued political instability means European stocks closed lower yesterday, and look to open lower as well, but it is the US where the focus will be today. Investors await Federal Reserve Chair Jerome Powell’s testimony to Congress for clues on the US interest-rate outlook. Overnight, the dollar and US Treasuries were both little changed, whilst Powell faces pressure from lawmakers and investors who are ever impatient for interest-rate cuts and unhappy with the Fed’s latest plan to boost capital requirements for Wall Street lenders. Markets are presently pricing the chance of two rate cuts this year, with a roughly 70% chance of the first in September, however it is the political landscape that makes me think it will be pushed towards the end of the year.

In Japan the currency reached a high last week close to JPY161.95, previously thought of as intervention territory. The Bank of Japan will speak face-to-face with market participants over the next couple of days in key meetings aimed at gauging a realistic pace for a reduction of its bond purchases to be announced later this month. Demand increased at a Japanese five-year auction as traders speculated about when and how much the BOJ will trim back bond buying. It's yield differentials remain central to consensus expectations regarding the outlook for the JPY. Fears that weak Japanese economic data will limit the ability of the BoJ to tighten monetary policy have been central to the view that the JPY remains a prime funding currency. As mentioned above, the continual pushing back of Fed rate cut expectations means long USDYEN has been an obvious play.

As for today we are data light, but speech heavy. Jerome Powell delivers the semi-annual testimony to the Senate Banking Committee; Janet Yellen testifies to the House Financial Services Committee, and the Fed’s Michael Barr and Michelle Bowman speak. As for volatility Bitcoin rose 1.9% to $57,307.08, and Ether rose 2.2% to $3,063.89. These have been the largest movers.

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