Written by Both equities and bitcoin jumped on Friday
Risk markets finished last week on a positive tone, with US equity indices posting gains across the board, led by the Dow Jones index, and the technology sector bouncing higher in the S&P 500 index after almost six abysmal sessions. Notably, after dangerously flirting with the $60k level, bitcoin bounced higher towards the $70k mark, keeping cryptocurrencies on life support until there is light at the end of the tunnel for US regulation. However, risk appetite may be challenged today.
Dollar on the back foot; all eyes on the yen
The US dollar posted gains last week, but its fortunes appear to have changed today. Markets are digesting Sunday’s Japanese general election result, with a barrage of verbal interventions from key Japanese officials pushing dollar/yen lower.
PM Takaichi’s LDP party beat expectations, achieving a comfortable majority and, along with its junior partner, the Ishin party, can now approve legislation even if the Upper House, where they do not hold a majority, disagrees. Quite oddly, Japanese stocks have surrendered their initial gains, potentially revealing a degree of anxiety about PM Takaichi being able to control government policy completely unchecked, and also reacting negatively to the yen’s strength.
This might prove a short-term reaction, though, as, when the dust settles, investors will most likely focus once again on the aggressive fiscal spending expected by Takaichi, potentially hindering the BoJ’s normalization efforts after the Shunto round concludes. This means that the intervention risk remains elevated despite today’s move lower in dollar/yen. Notably, Japanese yields are rising today, with the two-year jumping to a multi-decade high of 1.32%.
Chinese directive could provoke a harsh response from Trump
The dollar is facing broader issues as Chinese regulators have advised Chinese banks to reduce their US Treasuries exposure. Considering the recently calmer US-China trade relations, this move appears out of tune and could provoke an aggressive reaction from US President Trump, increasing chances of a short-term trade flare-up.
Notably, it will be interesting to see if this directive meaningfully impacts demand at this week’s 3, 10 and 30-year US Treasury note and bond auctions, which historically tend to produce better auction results than other points on the US yield curve.
US data and Fedspeak in the spotlight this week
While investors await the date of Warsh’s testimony at the Senate – assuming that Trump does not backtrack and propose another nominee – Fedspeak and US data are on the menu this week. Tuesday’s retail sales will act as an appetizer to Wednesday’s nonfarm payrolls figure and Friday’s CPI report. Interestingly, this week’s earnings are considered low key, but Coca-Cola, McDonald’s and Unilever results might offer more insight into consumer appetite, following Fed Chair Powell’s remarks at the late-January meeting that “spending isn’t uniform across all income groups, but overall consumer spending figures were good”.
New week, old troubles for the pound
The pound remains on the back foot, dropping to a three-week low against the euro. While last Thursday’s BoE meeting widely opened the door to a rate cut in the next two meetings, with the chances of a rate cut in March quickly rising from 20% to 50%, political uncertainty is the main reason for the pound’s performance.
The Mandelson-Epstein ties are testing the cohesion of the current Labour government. The resignation of PM Starmer’s chief of staff has not abated pressure from within the party, mostly from MPs unhappy with the recent Budget announcements and the dismissal of Deputy PM Angela Rayner, with certain cabinet ministers allegedly ready to offer an ultimatum to the PM: resign or lose the support of your own party. With one government source putting the chances of Starmer stepping down this week to 50%, the pound stands to underperform further, particularly if gilt yields bounce higher.
By XM.com
