Wednesday Jul 3 2024 14:08
6 min
1. Markets await UK elections, price in advent of Labour government
2. Hundreds of candidates drop out ahead of French election second round
3. Investors start to lean on Trump win in November, Powell says Fed not ready to cut
4. Fed playing for time as markets position for more inflationary environment
5. Bearish indicators flash for S&P 500 index, headline Eurozone inflation in line with estimates
In the UK, the market awaits — with perhaps a smidge too much complacency — the advent of a Labour government. It’s hard to know what will transpire during or after the UK election; politicians have been scared by the Liz Truss episode, which casts a long shadow over policymaking options.
For now, Labour has been at pains not to frighten the horses, but the pressure to lift Britain out of stagnation will only grow the longer Labour are in power; more borrowing seems a certainty.
"Securonomics” is untested and may be more radical than people realise. But the market might not react in the same way. The problem with Truss was policy uncertainty ratcheted up to the max — a Labour government is expected to deliver more clarity. We shall see if that is how it works. UK interest rates are set to come down soon, which will provide cover. If the market sniffs a genuine growth agenda alongside rate cuts, we could see the FTSE 250 outperform.
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In France, hundreds of candidates have dropped out of second round run-off lists, mainly to stop the Rassemblement National (RN, lit. “National Rally). Le Monde counted 221 candidates who have dropped out of the second round. It limits the chances of RN securing an outright majority in Sunday’s poll, but as we have discussed plenty of times here there are still plenty of risks for markets to consider. Even the more moderate aspects of the RN agenda involve conflict with the EU on key planks of the bloc – domestic subsidies, a rebate for France and deficits. Monthly figures for the French public deficit in May this morning don’t paint a pretty picture.
EURUSD traded a bit firmer and European shares were broadly higher with the CAC 40 index up 1.29% on the day.
On Wall Street, stocks rose to fresh record highs as investors bet more heavily on a Trump win in November and Fed chair Jay Powell indicated the central bank is not ready to cut interest rates. The S&P 500 finished above 5,500 for the first time, while the Nasdaq Composite ended above 18,000.
“We want to be more confident that inflation is moving sustainably down toward 2% before we start the process of … loosening policy,” Powell said at the central bank event in Sintra. But this amounts to tightening, as long as real rates are rising, which they are.
And they could rise further if Trump wins the presidential election, which is looking more likely the nearer it gets. There is growing pressure on Joe Biden to quit. US Democratic congressman Lloyd Doggett said he hopes President Biden “will make the painful and difficult decision to withdraw”, while Jared Golden, Democratic congressman from Maine, said “Donald Trump is going to win”. One in three Democrats think Biden should not stand this year.
But as my Overleveraged podcast colleague Helen Thomas from BlondeMoney points out, the Democrats are in a no-win position here.
Powell is relaxed about cutting, but there has been a move in the 10-year yield since the Presidential Debate. We have bear steepening – the view is that Trump back in the White House is going to pile on more debt, cut taxes and drive growth, which ought to be positive for stocks and negative for bonds.
Markets seem to be, tentatively at least, positioning for a more inflationary environment than we have now. Which might explain why the Fed is playing for time.
SPX breadth is narrow and bearish indicators are starting to flash. BofA notes that only 24% of stocks in the S&P 500 outperformed the index year-to-date, marking the third narrowest 6-month period in history since 1986. Goldman Sachs noted that a bear market usually follows when its Bull/Bear indicator is this elevated.
Eurozone inflation – headline was in line, down to 2.6%, but core was a slight miss, holding steady at 2.9% in June vs the expected decline to 2.8%.
Fed minutes are due tonight after ISM services, weekly jobless claims and the ADP payrolls report. Tomorrow is a holiday in the U.S.
USDJPY is still drifting higher. The Japanese yen drew closer to the 162 mark today but made some gains against the greenback in later trade. USD to JPY stood at 161.63 as of 13:45 GMT.
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