A pull back in risk sentiment in world markets last week saw stocks worldwide generally drop,
led by the big winners of the last few years, technology companies. This provided currency
investors with another excuse to buy safe haven currencies, led once again by the dollar, with
the Swiss franc just behind. The moves, however, were generally modest. Oil prices continue to
plummet as panic about shortages reverses, and spot markets seem awash with oil. The tit-for-
tat violations of the US-Iran ceasefire are doing little to support prices there, even though there
seem to be clear cut differences between the parties about what they have actually agreed to.
At any rate, investors seem eager to look past the messy outcome of the war.
Macroeconomic data take front and center this week. In the US, this is Jobs Week: a number of
key labor market indicators will be released throughout, culminating in the June payrolls report
out on Thursday. Markets expect a modest pullback from the torrid pace of job creation of the
last three months, to a level still consistent with a strong job market. In the Eurozone, flash
inflation for June will be released Wednesday. The first positive impact of lower energy prices is
expected to filter through to both the headline and core indices. As for the UK, all eyes will be on
PM-apparent Burnham's pick for Chancellor to gauge the strength of his commitment to the
fiscal rules.
GBP
Sterling continues to trade well against other European currencies, suggesting that Andy
Burnham's professed respect for the UK fiscal rules is being taken seriously for now, and no
fiscal risk premium is being exacted from the Pound. Although the data calendar is light, this
week should provide a key test of this assumption. We believe that investors are being too kind,
and are not pricing in the pressure from Labour's left to increase spending, whether that comes
at the expense of even higher taxation on business or increased Gilt issuance. Either way, we
see little room for further Sterling appreciation against the Euro.
EUR:
The June PMI indices of business activity rebounded to levels recently consistent with modest
growth, at an annualized rate of around 1%. We are somewhat optimistic that the combination
of lower energy prices and the slow diffusion of the German stimulus package from last year
may push these numbers up modestly, but it is hard to see it in the data yet. This week's
inflation data should offer some relief to the ECB, but perhaps more important for markets will
be the latter's many speeches and communications at its annual forum in Sintra, Portugal.
USD:
A string of positive data surprises last week (PMI indices, GDP, personal spending, durable
goods orders) suggests that the US economy continues to power ahead on the back of strong
investment, not all of it driven by AI. The key test comes this week, however, with the release of
June jobs data on Thursday, ahead of the Fourth of July holiday. Now that Chair Warsh has
vowed to reduce significantly the flow of information from the Federal Reserve to markets, key
data points like this week's payroll release take up added importance for investors.
