Written by What a difference a day makes
Looking at yesterday’s performance of the major equity indices, one would have assumed (again) that the rally is never-ending. Both the DAX 40 and FTSE/MIB indices reached fresh all-time highs on Monday, following last week’s IBEX index record high, contributing to another strong performance of the major US indices.
The Nasdaq 100 index once again led the rally, but the Dow Jones index made the headlines as it posted another record high. The year-to-date performance of the three major US indices is only a tad below their solid 2025 annual returns but is clearly dwarfed by the 39% rally of the Nikkei 225 index. European indices are once again the laggards.
However, sentiment during the Asian session reversed, as it has often been the case lately. Despite Samsung’s operating profit in the second quarter of 2026 beating estimates, the Korean KOSPI index posted a solid decline.
This weakness, which affected other tech giants in the region, has added fuel to the lingering concerns about AI valuations, colossal investment plans, and overall euphoria, which is justified by the transformational impact of AI but might be endangered by excessive expectations. These potentially unrealistic expectations could be put to the test when the earnings season starts later this week.
Monetary policy remains in the spotlight
After a busy start to the month, with the nonfarm payrolls report disappointing, investors remain focused on monetary policy, despite the quiet data calendar this week. Markets are adjusting to Warsh’s rhetoric and will be able to hear more from him at next week's testimony before Congress.
Interestingly, one of Warsh’s first initiatives was to lessen the importance of forward guidance. While his colleagues at the ECB and the BoE, at the recent ECB Forum in Sintra, Portugal, applauded his approach, Warsh is not getting the same vibe from the FOMC. Board member Waller, also short-listed to replace Powell, highlighted that forward guidance can influence financial conditions well ahead of an actual rate move, revealing some early cracks in FOMC cohesion.
Wednesday’s Fed minutes could suggest further objections to Warsh’s plan to revamp the Fed, although this text is usually extensively edited and vetted to tone down any likely disagreements that could send the wrong market signal.
Meanwhile, with the July ECB rate hike out of the picture, unless there is a restart of hostilities in the Middle East that closes the Strait of Hormuz again, the ‘battle’ has moved to the September meeting. Executive Board member Schnabel maintains her hawkish stance, potentially positioning herself as the leading hawk to replace President Lagarde.
Following the persistent drop in oil prices and the calmer geopolitical tensions – although today’s attacks on ships in the Strait of Hormuz suggest otherwise – rumours about Lagarde stepping down during 2026 have resurfaced. She has been touted as a candidate for the April 2027 Presidential election in France, which means that, in order to secure support from one of the existing political parties, Lagarde has to enter the Presidential race before the turn of the year. Therefore, September could even be her penultimate meeting.
Pound shows unexpected strength; yen struggles to maintain gains
With the clock ticking down to July 20 when incoming PM Burnham is set to take office, the pound has been recently outperforming both the euro and the dollar. Specifically, euro/pound has dropped to a one-year low despite the hawkish ECB stance and the political shenanigans in the UK, and pound/dollar quickly erased the mid-June decline and it is currently testing a resistance area. Notably, both BoE Governor Bailey and board member Mann are set to speak today.
Finally, dollar/yen is hovering just below 162 at the time of writing, partly reacting to positive Japanese data released earlier today, which is keeping the BoJ on a tightening path. Interestingly, the anticipation of a likely intervention is keeping the pair in check, as investors are anxiously trying to guess the trigger for intervention.
By XM.com
