Daily Market Outlook - Thursday, July 4

By Patrick Munnelly of Tickmill

Thursday, July 4, 2024 6:45 AM EDT

shallow focus photograph of black and gray compass

Image Source: Unsplash

Asian equities rose as economic data reinforced the Federal Reserve's case for interest rate cuts, and the yen rebounded from its lowest level against the dollar since 1986. Technology companies drove the MSCI Asia-Pacific gauge to its highest level in over two years, with Japan's Topix reaching a record intraday high and stocks in South Korea, Taiwan, and Australia also climbing. The S&P 500 and Nasdaq 100 set records in a short session before a US holiday, while US futures contracts saw minimal movement. The JPY strengthened after hitting its lowest level against the dollar since 1986, amid speculation that the Bank of Japan will gradually tighten regulations. The dollar index declined for the third consecutive session. Weak US economic data has raised the possibility of a rate cut in September, leading to a potential longest run of weekly gains for global equities since March. Data on Wednesday showed the US services sector contracting at its fastest pace in four years, along with signs of a weakening labor market. U.S. Treasury yields dropped sharply yesterday as the June ISM services index fell from 53.8 to 48.8, indicating a shift from expansion to contraction. This contrasts with the S&P’s services PMI, which showed healthy growth at 55.3. This discrepancy is unusual, as the ISM index is typically higher than the PMI, especially when using the ‘business activity’ component for comparison. However, the current situation is reversed. Two potential factors may explain this difference. Firstly, the ISM index includes government services, while the PMIs do not. The ISM report highlighted public administration as one of the areas experiencing contraction. Secondly, PMIs focus on domestic activity, while the ISM index might capture some external activities of multinationals, supported by a significant drop in new export orders within the ISM report.

The UK election is the main focus in Europe, with the only uncertainty being the extent of Labour's potential majority. Even Conservative ministers have acknowledged that they are likely to suffer a significant defeat, with bookmakers heavily favouring Labour. There is a possibility that strategic voting could push the Conservatives to third place, elevating the centrist Liberal Democrats to the primary opposition role and potentially altering the traditional power balance in Parliament. This shift could lead to a different agenda, as the opposition party typically sets the tone for parliamentary discussions, and a centrist approach would likely differ from the usual right-wing stance. Despite these potential changes in leadership, financial markets appear unperturbed, as FTSE futures remain steady and the value of sterling is close to a three-week high against the dollar. The Tories' previous reputation for economic management has been significantly damaged by the bond market turmoil following a controversial budget announcement, making Labour's fiscal policies appear less alarming. In fact, Labour leader Starmer has deliberately projected a conservative image when it comes to spending and taxes in order to avoid causing concern, and there are few left-leaning policies evident in the Labour manifesto. The FX market is expected to react significantly to the 10 pm exit poll headlines. However, if the exit poll does not deviate significantly from the consistent signals seen during the campaign, only small movements in the FX market are anticipated at first.

Overnight Newswire Updates of Note

Australia Trade Balance Shrinks More Than Expected In May
Fed's Goolsbee: Bringing Inflation Back To 2% Takes Time
European Central Bankers Warn Of Risks To Region’s Economy
UK Has To Steer Clear Of Tariffs On Chinese EVs
AUD/USD Holds Gains Above 0.6700 After Australian Trade Data
10-Year Treasury Yield Tumbles After Weak Economic Data
Crude Eases On Softer US Data, Hurricane Uncertainty
Asian Stocks Climb, Yen Rallies Off Historic Lows

(Sourced from Bloomberg, Reuters and other reliable financial news outlets)

FX Options Expiries For 10am New York Cut

(1BLN+ represent larger expiries, more magnetic when trading within daily ATR)

EUR/USD: 1.0730 (440M), 1.0750 (376M), 1.0770-80 (2.2BLN)
1.0790-1.0800 (1BLN)
USD/CHF: 0.8985-0.9000 (581M) . EUR/CHF: 0.9700 (390M), 0.9745-50 (450M)
GBP/USD: 1.2715 (320M), 1.2750 (460M), 1.2770 (275M), 1.2790-1.2800 (1BLN)
AUD/USD: 0.6635-40 (758M), 0.6645-55 (653M), 0.6700 (301M), 0.6745-55 (728M)
NZD/USD: 0.6130 (1.5BLN)
EUR/JPY: 169.50 (882M), 171.90 (1BLN)

CFTC Data As Of 25/06/24

Euro net short position is -8,431 contracts
Japanese Yen net short position is -173,900 contracts
Swiss Franc posts net short position of -35,057 contracts
British Pound net long position is 44,048 contracts
Bitcoin net short position is -624 contracts
Equity fund managers raise S&P 500 CME net long position by 17,079 contracts to 977,134
Equity fund managers raise S&P 500 CME net long position by 17,079 contracts to 977,134