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Markets Approach Mid-Year Amid Political, Economic Uncertainty
As we approach the halfway mark of 2023, global investors face a mix of political narratives, tech market fluctuations, and a widening transatlantic business activity gap. The upcoming release of the Federal Reserve's preferred PCE inflation gauge and the ongoing decline of Japan's yen and China's yuan add further complexity to an already eventful summer.
Last week witnessed a significant setback for Nvidia, the leading figure in artificial intelligence, with its shares retreating about 10% from record highs. This decline is attributed to profit-taking after a significant surge, along with the impact of major futures and options expirations on Friday. Additionally, the U.S. presidential TV debate scheduled for Thursday is likely to intensify speculation about November's election, potentially altering the market's tone as we approach the end of the first half of the year.
European Politics in Focus
Political events are also under the spotlight in Europe. France is preparing for the first round of its parliamentary elections this weekend, while Britain heads to the polls on July 4. Despite these upcoming elections, markets appeared resilient on Monday, with European stocks climbing, Britain's FTSE rising, and U.S. stock futures slightly positive. However, the VIX volatility gauge has increased to its highest level this month, influenced partly by renewed hopes for interest rate cuts in both Europe and the U.S.
Disparities in Business Activity
Recent economic data reveals a significant divergence in business activity across the Atlantic. Flash business surveys for June indicate that the euro zone and Britain are experiencing a notable slowdown, barely maintaining expansion, while the U.S. shows accelerated growth. This disparity has contributed to a global economic surprise index turning negative, its worst reading in nearly a year. Germany's Ifo institute further highlighted Europe's economic hesitation, reporting an unexpected drop in business morale, with the business climate index falling to 88.6 in June.
Yen and Yuan Under Pressure
The Japanese yen continues to skid closer to a 34-year low, prompting possible intervention from Japanese authorities. The yen's decline has been closely monitored, with Japan recently added to the U.S. Treasury's foreign exchange monitoring list. The Bank of Japan's June policy meeting revealed that some policymakers are considering timely interest rate hikes due to potential inflation overshoots.
In China, rising global trade tensions and signs of foreign capital flight have caused continued underperformance in the markets. The mainland CSI300 dropped 0.5% on Monday, and the offshore yuan hit its weakest level this year.
Company News and Market Movers
In corporate developments, the EU has accused Apple's App Store rules of breaching tech regulations by preventing app developers from directing consumers to alternative offers, potentially resulting in a sizable fine. Additionally, Eurofins Scientific saw a sharp drop of up to 19% after Muddy Waters announced a short position on the company. In contrast, Britain's Prudential gained 6.3% following the announcement of a $2 billion share buyback program.
Upcoming Market Influencers
Key developments to watch later on Monday include the Dallas Fed June manufacturing survey, speeches from Federal Reserve Board Governor Christopher Waller and San Francisco Federal Reserve President Mary Daly, and remarks from Bank of Canada Governor Tiff Macklem. The U.S. Treasury will also auction 3- and 6-month bills, and corporate earnings reports from Beyond Air and MoneyHero are expected.
