Markets Take A Summer Stroll Along The Path Of Least Resistance

WHERE WE STAND – The weather here in London might not entirely be playing ball, but I think ‘summer markets’ have well and truly arrived, judging by the relatively turgid nature of trade yesterday.

Anyway, we did get a pretty strong hint from the Treasury Secretary that ‘TACO time’ might be upon us soon, with Bessent yesterday noting that the Trump Admin’s focus is on getting ‘high quality’ trade deals, as opposed to being on the timing of said deals. Of course, this is very much in line with my base case anyway, which is that the trade can will continue to be kicked down the road, with Trump & Co having shown numerous times that they have no desire, or ability, to stomach tariffs at super-high levels. Any threats thrown around in the meantime are simply negotiating gambits, and part of the great big ‘escalate to de-escalate’ game that continues to be played.

Of course, this continued trade de-escalation, and ultimate progress towards deals being done, continues to support the bull case for equities. Add to that solid earnings growth, plus a resilient underlying US economy, and the path of least resistance still clearly leads to the upside. This was handily demonstrated yesterday, where stocks on Wall St ended comfortably in the green, at fresh record highs.

That’s, of course, not to say that there aren’t risks on the horizon. Wednesday’s earnings from megacap names Alphabet and Tesla will be closely watched, before focus turns to the following Wednesday’s FOMC decision, then next Friday’s jobs report, and tariff deadline. Assuming all of that is navigated without a hitch, however, a slow but steady drift to the upside should ensue over the summer.

Speaking of upside, Govvies gained across DM as the week got underway, in a move that seemed to come largely as a spill-over from last weekend’s Japanese upper house election results. While the ruling LDP lost their majority, the party won considerably more seats than expected, thus lessening the likelihood of needing to form a messy coalition, and also reducing the chances of significant fiscal stimulus being delivered.

This, clearly, helped to soothe some of the fiscal jitters elsewhere, with long bonds gaining substantial ground, as benchmark 30-year Treasury yields fell to their lowest level in a week, and 30-year Gilts rallied 7bp or so. While Rachel Reeves writes out a letter of thanks to the Japanese electorate, I’ll note that this probably puts Treasury dip buyers in control for the time being, given the lack of major event risk until next Wednesday’s FOMC, though a move below 4.75% in the 30-year seems a stretch for now.

Anyway, the rally in Treasuries posed a fairly stiff headwind to the greenback, which grew stronger as the day went on. While the JPY outperformed, predictably given the election result, the quid also traded well, and the EUR managed to clamber its way back above the 1.17 mark. The technical analysis folk will also be pleased that the dollar index (DXY) rejected a move north of its 50-day moving average, which keeps the recent downtrend intact. A downtrend, I must admit, that remains my base case, as the Fed’s policy independence continues to be eroded.

This erosion, as I’ve noted before, should benefit gold as reserve allocators shift out of the buck, and the yellow metal finally woke up yesterday. Yes, it would appear that bullion’s salad days may be set to resume once again, as spot rose to 1-month highs at $3,400/oz yesterday, and with the bull case remaining a solid one. My view remains that we could get another test of record highs before the year is out.

LOOK AHEAD – A very light docket ahead today.

Public borrowing figures from here in the UK are due this morning, and will probably make for yet more grim reading for Chancellor Reeves, particularly after borrowing in May was the highest, ex-covid, since records began back in 1993. With every passing day, substantial tax hikes in the autumn Budget become more and more likely.

Elsewhere, the Richmond Fed provide their monthly manufacturing survey which, while seldom a market-mover on its own, does help to shape expectations for the ISM manufacturing PMI, out in a week or so.

Speaking of the Fed, both Chair Powell and Governor Bowman are scheduled to speak today, however neither will make remarks on policy, or the economic outlook, with the FOMC well into the pre-meeting ‘blackout’ period. BoE Governor Bailey is also set to speak, on financial stability,

Lastly, Q2 earnings season continues apace, with reports due today from numerous defence names, as well as Coca Cola, and SAP, the latter being the largest stock in the DAX.