Market Report.
🏦 We closed a hard central bank week, but there are many more things to tell at the close. I hope this report doesn’t get too long.
🇯🇵 The Bank of Japan (BOJ) left its benchmark interest rate unchanged at 0.5% at the end of a two-day policy meeting on Friday. This decision was widely expected, but the vote on rates was 7 to 2. This means that two of its members wanted to raise the rates, and therefore that number may increase for the next meeting.
💹 The BOJ announced that it will begin offloading its exchange-traded fund (ETF) holdings and real-estate investment trusts (REITs), which are worth more than ¥37 trillion by book value. The central bank became the biggest single holder of Japanese stocks around 2020 during its massive monetary easing program. The decision to unload ETFs came much sooner than the market was expecting, pushing down the benchmark Nikkei index and causing the yen and short-term bond yields to surge.
⚖️ The lack of rate action was attributed to the lingering economic and political uncertainty in Japan. Prime Minister Shigeru Ishiba’s recent resignation declaration has kicked off a race for his successor, roughly a year after the last leadership election.
🇬🇧 Meanwhile, The Bank of England (BOE) has decided to reduce its sales of long-dated bonds from its inventory, acknowledging the damage it has done to public finances through its aggressive quantitative tightening (QT) program.
💰 The BOE will now reduce its gilt hoard by £70 billion over the next year, down from the previous plan of £100 billion. This represents a nominal increase from last year’s £13 billion of active sales, but a reduction in terms of duration.
📉 The BOE has been the only central bank to aggressively reduce its balance sheet, liquidating some purchases made above par value at prices as low as 30 pence in the pound, with minimal regard for preserving capital value. During the three years of active sales, or quantitative tightening, 30-year gilt yields have doubled and increased by more than 100 basis points in the last year to levels not seen since 1998. Compared to US Treasury equivalents, 30-year rates in the UK are 80 basis points higher.
🇫🇷 In Europe, hundreds of thousands of people across France took part in anti-austerity protests on Thursday, urging President Emmanuel Macron and Prime Minister Sebastien Lecornu to scrap looming budget cuts. Protesters and unions called for the previous government’s fiscal plans to be scrapped, for more spending on public services, higher taxes on the wealthy, and the reversal of an unpopular pension reform.
📊 France’s budget deficit last year was close to double the EU’s 3% ceiling, and Lecornu will face a battle to gather parliamentary support for a budget that reduces the deficit. The prime minister has signaled a willingness to compromise, as his predecessor was ousted by parliament over a plan for a 44 billion euro budget squeeze.
🇪🇺 The European Union is inching toward issuing joint debt to help fund investments needed to improve its economy, according to Austria’s Finance Minister Markus Marterbauer. Common borrowing by the EU’s 27 members was a key recommendation made by former Italian Prime Minister Mario Draghi to boost the bloc’s competitiveness, but it remains a controversial topic.
🛠️ The EU issued collective debt for the first time to help the continent recover from the COVID-19 pandemic, and launching a similar program for defense and climate could unleash the bloc’s spending power and help drive down costs.
📈 European Central Bank officials, including President Christine Lagarde, have been supportive of increasing the EU’s fiscal capacity through some form of common financing. But realistically, the Germans, who have historically opposed this by being more conservative in their finances, will not agree to put their finances together with some French people who are spending more than you earn, and who increasingly resemble the Mediterranean economies.
🔌 The European Union is planning measures to accelerate the bloc’s phaseout of Russian liquefied natural gas (LNG), just days after U.S. President Donald Trump called on the EU to do more to curb Moscow’s energy trade. The European Commission is considering including a provision in its new sanctions package to phase out imports of all Russian LNG earlier than the end of 2027, which was the EU’s initial plan.
🇺🇸 The U.S. has repeatedly indicated its interest in supplying more LNG to Europe, and a commitment to buy more U.S. LNG was a central plank of the EU’s pledge under the recently agreed EU-U.S. trade deal. The United States has advised the European Union against purchasing LNG from their Russian neighbors, labeling them as unethical due to their invasion of Ukraine. Instead, it encourages the EU to buy LNG from the U.S., even at a higher cost. This recommendation follows the destruction of the Nord Stream II gas pipeline linking Russia and Germany.
🛢️ To top it off, the Trump administration has urged partners to slap tariffs of up to 100% on China and India for their purchases of Russian oil.
🤝 But there are still diplomatic efforts on the part of Trump to ease global tensions. President Donald Trump has declined to approve a more than $400 million military aid package for Taiwan as he seeks a trade deal with China, according to the Washington Post. The pause in security assistance aligns with the Trump administration’s efforts to cool tensions with Beijing as it seeks an expansive trade agreement with China.
📞 The call between U.S. President Donald Trump and Chinese President Xi Jinping Today will be crucial in determining the fate of the TikTok deal and potentially easing trade tensions between the two countries. The leaders’ conversation will be their first since June, with the two countries locked in a standoff over trade restrictions affecting industries like semiconductors and rare earths.
💼 The TikTok deal would see ByteDance hold no more than 20% of the U.S. operations, with other investors including Oracle, Andreessen Horowitz, and Silver Lake Management. The U.S. and China are also in the midst of a tariff truce that is set to expire in November.
🛠️ According with Financial Times, China’s internet regulator, the Cyberspace Administration of China (CAC), has told the country’s biggest technology companies to stop buying all of Nvidia’s artificial intelligence chips and terminate their existing orders. The ban includes Nvidia’s RTX Pro 6000D chip, which was introduced just two months ago and had seen significant interest from Chinese companies.
🏭 The goal is to boost China’s homegrown semiconductor industry and reduce reliance on Nvidia, in order to compete with the US in the AI race. Chinese regulators have summoned domestic chipmakers and tech companies to compare their AI processors against Nvidia’s China-specific chips, and concluded that domestic products have reached a comparable or superior level.
📈 Nvidia’s market capitalization has grown exponentially in the past two years, reaching an astounding $4.28 trillion. Rather than simply hoarding its massive cash reserves, Nvidia is strategically investing in and partnering with other AI firms to maintain its position as a market leader.
🤝 The company recently announced a $5 billion investment in Intel, enabling collaboration between the two chip giants. Nvidia also spent nearly $1 billion to hire the CEO of an AI startup and license its technology. Additionally, Nvidia unveiled £11 billion ($15 billion) of investment in the U.K., part of which will be used to deploy 120,000 Blackwell chips in the country.
📊 Market view.
📈 The Mini S&P 500 futures reached new highs during yesterday’s session, positioning themselves above 6,700 points. The Nasdaq 100 futures did the same, rising above 24,800 points before retracing to the current 24,700.
💵 The dollar continued to strengthen despite the rate cut and is currently at the upper end of the range we have defined for weeks, around 97.50 points. This could indicate that the decline we have seen over the past two days in EUR/USD may have bottomed out, with the 1.1770 area serving as potential support for today’s session.
📈 Meanwhile, European equities opened higher, with the DAX 40 at 23,860 points in its futures contracts. Eurostoxx futures are also recovering strongly, reaching 5,470 points.
📉 Crude oil continues to decline gently after the highs reached on Tuesday, with Brent crude currently trading at $67.30, down from $68.50.
💰 Gold futures are consolidating following the new highs on Tuesday around $3,680, which has begun to establish itself as a support zone over the past two weeks.
💸 Bitcoin nearly reached $118,000 during yesterday’s session but has retraced in recent hours to the current $116,800.
