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Market Overview as U.S. Election Heats Up
The trading landscape remains calm as the first half of the year concludes, despite an intense U.S. presidential race with Donald Trump looking strong after a poor debate showing by President Joe Biden. Opinion polls suggest a tight race, but markets are refraining from making significant bets ahead of the November election outcome. The possibility of an alternative Democratic candidate being proposed adds to the uncertainty.
Market Reactions and Economic Indicators
U.S. stocks and the dollar showed modest gains early on Friday, with Treasury yields stable. The VIX 'fear index,' a measure of equity volatility, stays near its lowest levels of the year. Currencies such as China's yuan and Mexico's peso were largely unaffected by Trump's tariff and immigration proposals. In contrast, Japan's yen reached a new 38-year low, provoking speculation about potential intervention by Japanese authorities, especially with a new top foreign exchange diplomat, Atsushi Mimura, taking over.
French Bonds and Upcoming Elections
Meanwhile, French bond markets are experiencing heightened tension ahead of the country's two-round elections. The risk premium on French government bonds over German bonds reached a 12-year high, reflecting nervousness about far-right parties potentially gaining a significant share of the vote. The spread between German and French 10-year yields widened to 84 basis points, the most since September 2012, although nominal yields remain below last year's peaks.
Economic Data Signals Mixed Outlook
On Wall Street, economic indicators presented a mixed picture. U.S. jobless claims dropped last week, but the number of people on unemployment benefits surged to a 2-1/2 year high in mid-June. Additionally, a key proxy for business spending saw an unexpected decline, and the goods trade deficit widened by 2.7% to $100.6 billion. The Atlanta Fed's 'GDPNow' estimate dipped to 2.7%, with economic surprise indexes showing their most negative readings in nearly two years. Better news is expected from the upcoming PCE inflation release, with forecasts indicating a decline in the annual core rate to 2.6%, its lowest in over three years.
Federal Reserve's Stance and Fiscal Concerns
Despite some positive inflation news, Fed officials are cautious about loosening interest rates. Atlanta Fed President Raphael Bostic mentioned the possibility of a rate cut later this year, whereas Fed Governor Michelle Bowman highlighted ongoing upside risks to inflation. In a notable recommendation, the International Monetary Fund urged the U.S. to raise taxes to address rising debt levels but praised the robust economic growth.
Corporate News: Nike's Forecast
In corporate developments, Nike's shares plunged 12% after it projected a surprising revenue drop for fiscal 2025, attributing the decline to decreasing demand for its sneakers amid competition from newer brands like On and Hoka.
Key Developments to Watch
Important indicators and events to watch on Friday include the U.S. May personal income and consumption data, the PCE inflation gauge, the Chicago June business survey, and the University of Michigan final June consumer sentiment survey. Additionally, remarks from Fed officials and the outcome of the Iranian Presidential election could provide further market direction.
