Market Report.
💰 The Federal Reserve resumed interest rate cuts but tempered its message with warnings of sticky inflation, sowing doubt over the pace of future policy adjustments. The Fed stopped short of endorsing market expectations for a clear string of rate cuts.
📊 The Fed’s updated economic projections reflected expectations of more easing this year, but its forecast for inflation ending 2025 at 3% well above the 2% target dampened market optimism. The Fed is in a challenging situation, facing a mix of higher inflation and a weaker labor market, which has sparked fears of stagflation that could complicate its ability to support the jobs market.
🇬🇧 Now it is the turn of the Bank of England, which has a situation more close to the Fed than its neighbors the ECB.
💷 The Bank of England is expected to slow the pace at which it reduces its government bond holdings (quantitative tightening) on Thursday, while keeping its main interest rate on hold. Economists expect the BoE to slow the pace of bond sales to a median 67.5 billion pounds per year, a bigger drop than the previous forecast of 72 billion pounds.
📉 The BoE could slow quantitative tightening by more than expected, potentially to 60 billion pounds or skew its sales towards shorter-dated gilts, to address the increased volatility in bond markets.
🔒 The analysts unanimously expect the BoE to keep interest rates on hold at 4%, in contrast to the U.S. Federal Reserve’s decision to cut rates further. British government borrowing costs and inflation are both the highest in the G7 economies, with inflation forecast to peak at 4% this month before slowly returning to the 2% target. There is only a 30% chance of a rate cut this year according to interest rate futures.
📊 The BoE’s August rate decision only passed by a narrow 5-4 majority, and economists expect a 7-2 vote to keep rates on hold this month as they wait for signs that underlying inflation pressures are fading.
🇭🇰 In China, Hong Kong’s monetary policy moves in lock-step with the United States as the city’s currency is pegged to the greenback in a tight range of 7.75-7.85 per dollar. The Hong Kong Monetary Authority (HKMA) lowered its base interest rate by 25 basis points to 4.50%, tracking a cut by the U.S. Federal Reserve. Major Hong Kong banks partially followed, with HSBC and Bank of China (Hong Kong) lowering their Hong Kong dollar best lending rates.
🏢 HKMA Chief Executive Eddie Yue said the reduction will have a positive impact on the city’s property market and economy, noting that financial and monetary markets continue to operate in a smooth and orderly manner. Yue stated that the Fed might cut rates further by 50 basis points before the end of the year.
👑 Trump and King Charles are joined at the State Dinner by executives. Among the 160 attendees were media mogul Rupert Murdoch, Steve Schwarzman of Blackstone, Jensen Huang of Nvidia, Tim Cook of Apple, and Rene Haas of Arm.
🤝 Regarding this visit, Donald Trump breaks protocol in Windsor by giving two pats on the back to King Charles III, a gesture considered a serious violation of etiquette in the UK. In addition, during the parade before the soldiers of the palace, I walk next to one of the soldiers, leaving King Charles at his slapda for several meters. Even worse than the scene of 2018, where he walked ahead the Queen.
💸 According with Bloomberg, UK taxpayers have lost £400 million ($547 million) on the Future Fund, a startup investment rescue fund launched by former Prime Minister Rishi Sunak during the pandemic. The Future Fund was worth £609 million at the end of March, with the government collecting £128 million in income and sales, lifting the value of the portfolio to £737 million.
📉 However, losses have got progressively worse every year, with 334 companies now bust and just 89 having exited for cash or repaid the loans. Taxpayer investment was made in the form of convertible loans on the condition that the funding was matched by private investors. An initial £250 million commitment quickly increased, and by the time it closed in 2021, there were 1,191 companies in the portfolio, including a lower league football club, a sex party firm, and a cannabis products company.
🏦 The British Business Bank, which administers the fund, acknowledged that the private sector would back the best businesses and leave the taxpayer with “the second tier, which will likely result in higher associated loss rates.” The British Business Bank stated that it is too early to give an indication of the overall Future Fund performance.
🇫🇷 French unions are leading widespread anti-austerity protests on Thursday against spending cuts proposed in July that they say amount to “unprecedented brutality”. The protests are expected to cause significant disruption to public transport in France, with more than half of regional trains potentially not running. Prime Minister Sebastien Lecornu has little financial margin to appease protesters as he struggles to find allies to piece together a budget and tackle the widest budget deficit in the euro area.
✊ Opposition groups are pushing for many concessions, including suspending President Emmanuel Macron’s 2023 pension reform and restoring higher wealth taxation, which the outgoing government has warned would threaten investment in France. The protests and political uncertainty have also led to a renewed selloff in French assets, pushing the country’s borrowing costs relative to peers to highs not seen since January.
📉 Market View.
📉 The Fed has finally cut interest rates by 25 basis points, as expected. Reactions are mixed. The equity markets celebrate, while Forex tells a different story. The Mini S&P 500 futures have surged again following the announcement of the rate cuts, currently sitting at 6,685 points. Nasdaq futures are following suit, currently at 24,610 points.
💵 As we mentioned, the situation with Forex is different. There is a possibility that dollar traders were expecting more clarity about the coming months, as the Fed has avoided providing details on when the next cuts will occur.
📈 Perhaps for this reason, the dollar has strengthened, with the DXY dollar index recovering to 97 points after a flash crash that brought it down to around 96.20. Pairs like EUR/USD have retraced towards the 1.1795 area.
📊 In Europe, DAX 40 futures rebounded during yesterday’s session, appearing to experience a pullback effect without surpassing the resistance of 23,500 points, which was previously a support level. Eurostoxx 50 futures have also timidly advanced to 5,395 points, still far from the levels reached on Monday.
🛢️ In oil, Brent crude has retreated from Tuesday’s levels of $68.50 to the current $67.75.
💰 Gold future has significantly decreased from Tuesday’s levels following the rate cut but remains strong, reaching $3,670 per ounce.
💻 Bitcoin has approached the $118,000 mark in recent hours, slightly retracting to the current $117,050.
