Senior Relationship Manager
Summary: Markets cautiously optimistic after Powell and ECB
Good Morning
Yesterday was quite a day with large swings on the ECB and Jerome Powell's speech. In the end equities ended higher and the USD gave up ground on hawkish tones from both and a largest ever rate hike by the ECB.
The European Central Bank raised its key interest rates by an unprecedented 75 basis points indicated further hikes, prioritizing the fight against inflation even as the bloc's economy is heading for a likely winter recession.
With inflation at 50 Year high, policymakers are worried that rapid price increases could become entrenched and lead to secondary effects. The decision for the for a 75-basis point hike was unanimous. The interesting part of the ECBs decision may well be that there were no measures taken to reduce liquidity. This can indicate the ECB is looking to support the economies while appearing to fight inflation.
The Federal Reserve is "strongly committed" to controlling inflation but there remains hope it can be done without the "very high social costs" involved in prior inflation fights, Jerome Powell reiterated, making another 75 bps hike more probable, it is now traded at 85%.
All three US Indexes closed 0.6% higher with banks in the lead. The Dax swung widely yesterday, from 13045 to 12690 (in the Future) to currently trade at 12900.
The USD gave up ground over night despite Powell, with not fully clear reasoning, the USD Index fell to 109, EURUSD rose to 1.0060, GBPUSD 1.1580 and USDJPY 143.10.
The BoJ intervened verbally stating rapid moves of the JPY were undesirable, pushing USDJPY from 144.12 to 142.48. The 1998 dollar/yen high at 147.66 looms in the mind of many “old FX traders.
Gold and Silver could rise to 1718 and 18.75. Bitcoin can retake the 20k to trade at 20530, the upcoming Ethereum merge raising interest in crypto again.
Chinas Consumer Price Index rose less than expected at 2.5% vs 2.8% expected.
Italy Plans To Spend At Least 6.2 Billion Euros To Help Firms And Families Cope With Surging Energy Costs
Britain will cap consumer energy bills for two years and funnel billions to prop up power companies, the day in Britain will be dominated by the death of Queen Elisabeth II yesterday, King Charles will hold a speech later today.
The economic calendar is fairly empty today, the market will focus on the EU Energy summit and try to digest the recent moves and comments. The US CPI as well as the large Q* expiry next week will be the key topics coming up.
AI: The good, the bad, and the bubble
While a deep recession may not be iminent thanks to central bank policy, interest rates will have to stay high for longer, and this will be accompanied by volatility risk from the unwinding of bubbles, especially within AI.
Steen Jakobsen,
Chief Investment Officer
The emergence of advanced AI systems is by far the most surprising event this year, turning everything upside down, while risks and benefits are debated. AI will also become an arms race between the US and China.
Peter Garnry,
Head of Equity Strategy
As China navigates global fragmentation, its cycle of technology application, productivity enhancement, and growth is threatened by US breakthroughs in generative AI, limited computing power, and geopolitical tensions.
Redmond Wong,
Market Strategist
Japan’s expertise in semiconductors and robotic integration could be the foundation of AI dominance. Combining two of this year's themes, Japanese equities and artificial intelligence, brings a wave of opportunities.
Charu Chanana,
Market Strategist
The AI fever has turned the technology into a darling, pushing crypto further into no-man’s-land. There are striking similarities between AI and crypto, and if these are to come full circle, AI won't be spared for bubbles.
Mads Eberhardt,
Cryptocurrency Analyst
Stocks related to artificial intelligence (AI) have appeared on investors' radars. Expectations are high, but it may be necessary to consider how to get exposure to AI in a diversified way.
Hans Oudshoorn,
Trainer Academy
The USD is on its back foot as markets celebrate an eventual Fed rate peak and steady long US yields. The stakes are even higher for the Japanese yen if longer major sovereign yield curves have to price in economic acceleration.
John J. Hardy,
Head of FX Strategy
While commodities, broadly speaking, have faced some tough months, a partial reversal during June could signal that the asset class is getting back on its feet with energy holding up and precious metals with upside potential.
Ole S. Hansen,
Head of Commodity Strategy
As inflation remains high central banks face hard decisions about whether they should keep hiking interest rates or stop. Meanwhile, the rise of AI creates bubble-like conditions that only make the decision harder.
Althea Spinozzi,
Senior Fixed Income Strategist