Markets are almost fully priced for a 25bp reduction in US rates, the dollar remains offered across the board, and the US 2-year yield, while rebounding from 3.50% last week, is still hovering near its lowest levels of the year. Equity markets are enjoying the ride, with the S&P 500 hinting at a positive start after hitting a fresh record on Friday.
In Europe, sentiment across futures is encouraging even though the European Central Bank (ECB) refrained from further easing last week, signaling its rate-cutting cycle is likely over. The FTSE 100 pulled back from near-record highs on Friday. The Bank of England (BoE) is expected to hold rates steady this week given sticky inflation pressures, while the Bank of Canada (BoC) is widely expected to trim by 25bp to support an economy squeezed by trade headwinds. Diverging central-bank stances are creating interesting FX opportunities: the US dollar is soft on the back of easing Fed expectations, the euro remains supported by firmer ECB policy and more trade clarity with the US, though political risks in France cap upside. Fitch downgraded France's credit rating from AA- to A+ on Friday, citing the lack of a credible debt-control plan. The move could further widen the French-German yield spread as institutional investors adjust portfolios, potentially triggering further selling in French bonds. Sterling holds firm against a weaker dollar but loses ground to the euro. The BoE's hawkish stance looks less appealing amid sticky inflation, tax increases and a slowing economy. UK 10-year gilt yields stand near 4.65% this morning — among the highest across DM peers.
Yields across developed markets have risen sharply since pre-pandemic times, reflecting higher inflation, spending and debt burdens. Pandemic-era debt expansion continues to weigh on long-maturity sovereigns, driving flows into commodities. As such, gold consolidates near all-time highs, silver pushes toward levels last seen in 2011, while EM central banks continue to add gold at the expense of US Treasuries.
Crude oil rises this Monday morning on the back of weekend attacks on Russian oil facilities and Trump asks its allies to stop buying energy from Russia, and threatens to impose up to 100% tariffs on India and China that refuse to stop buying the cheap Russian oil. The latter should cement support near the $62pb mark yet the bulls need a major geopolitical shakeup to sustainably break above the $65pb level at a time OPEC is willing to bring more oil to the market – though their capacity to do so is broadly questioned.
In Asia, the week began with weaker-than-expected Chinese data on industrial production, retail sales, and investment, alongside a higher unemployment rate. Yet markets took the disappointment as a cue for more stimulus. Combined with AI enthusiasm, this is keeping Chinese equities in demand: the CSI 300 is up, the Hang Seng consolidates near a four-year high. EV-battery giant CATL rallied almost 10% to a fresh record in Hong Kong after Beijing announced a new energy-storage plan and JPMorgan upgraded the stock. Broader Asian equities hit record highs Monday, fueled by dovish Fed expectations, a weaker dolalar and tech strength. Alibaba extended last week's rally (+3%), BYD climbed 4%, while Tencent trades near its 2021 peak. In Korea, the KOSPI is riding strong inflows into tech, as well. National chip champion SK Hynix opened at a fresh record high before paring gains. The AI-backed rally in Asian tech looks to have more room to run, with valuations still well below US peers. Asian tech ETFs continue to offer investors an attractive way to diversify away from US names while still riding the AI, tech boom.
