25 Jul

The ECB will face tough choices at its next meeting. The People’s Bank of China conducted currency intervention to support the yuan

July 25, 2023

By JustMarkets

At Monday’s close of the stock market, the Dow Jones Index (US30) closed up by 0.52%, while the S&P 500 Index (US500) added 0.40%. The NASDAQ Technology Index (US100) closed positive by 0.19% on Monday. The Dow Jones Index (US30) extended its daily winning streak to its eleventh consecutive gain, helped by a rally in energy. Energy stocks were supported by a rise in oil prices to an April high amid bets that OPEC supply cuts will tighten market conditions.

The Federal Reserve begins its two-day meeting on Tuesday. A 0.25% rate hike is expected as early as tomorrow, which is already fully factored into the price. Morgan Stanley analysts believe Wednesday’s expected rate hike could likely be the final rate hike, predicting a peak federal funds rate of 5.375% this year.

Equity markets in Europe traded flat yesterday. Germany’s DAX (DE40) increased by 0.08%, France’s CAC 40 (FR40) fell by 0.07%, Spain’s IBEX 35 (ES35) declined by 0.29%, and the UK’s FTSE 100 (UK100) closed 0.19% higher.

The fall in economic indicators across Europe poses a difficult task for the European Central Bank: to make another rate hike in September or to switch to full data dependence. For the ECB, there are now three main options:

  • The ECB continues to signal that if the core level of inflation is maintained, further tightening is likely. Such signaling is likely to trigger a hawkish market reaction with interest rate expectations rising.
  • The ECB maintains a fully data-dependent regime, with a willingness to hike but no clear bias towards tightening. In this scenario, the market reaction could be moderately dovish.
  • The Central Bank assumes that clear progress has been made toward the inflation target, and it is unclear whether further rate hikes are needed. In this scenario, market reaction is likely to be very dovish.

The middle scenario is the closest considered by analysts, which could put pressure on the euro against the dollar in the near term.

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Gold’s rally appears to be weakening ahead of this week’s policy meetings between the US Federal Reserve, the European Central Bank, and the Bank of Japan. Gold is highly sensitive to US government bond yields and the dollar index. Hawkish comments from the US Fed will give temporary support to the dollar, which will be negative for precious metals. But in the medium and long term, banks expect the dollar and government bond yields to fall, so gold still has good growth prospects in the higher time frames.

Asian markets were mostly down yesterday. Japan’s Nikkei 225 (JP225) increased by 1.23%, China’s FTSE China A50 (CHA50) fell by 0.54%, Hong Kong’s Hang Seng (HK50) lost 2.13% on the day, and Australia’s S&P/ASX 200 (AU200) was negative by 0.10% on Monday.

Chinese state-owned banks unexpectedly conducted currency intervention to support the yuan against the dollar. The People’s Bank of China (PBoC) set the yuan (CNY) discount rate at 7.1406. It is allowed to trade plus-minus 2% of this rate. This applies to CNY, which is traded on China’s exchanges. There is also an offshore yuan (CNH). Its trading range is unlimited, so significant fluctuations in the exchange rate compared to CNY tend to trigger a reaction from the PBoC.

S&P 500 (F)(US500) 4,554.64 +18.30 (+0.40%)

Dow Jones (US30) 35,411.24 +183.55 (+0.52%)

DAX (DE40)  16,190.95 +13.73 (+0.085%)

FTSE 100 (UK100) 7,678.59 +14.86 (+0.19%)

USD Index  101.40 +0.33 (+0.32%)

Important events for today:
  • – German Ifo Business Climate (m/m) at 11:00 (GMT+3);
  • – US CB Consumer Confidence (m/m) at 17:00 (GMT+3).

By JustMarkets

 

This article reflects a personal opinion and should not be interpreted as an investment advice, and/or offer, and/or a persistent request for carrying out financial transactions, and/or a guarantee, and/or a forecast of future events.


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