Holly Thompson

Global equities rose for a second week as US inflation fell to 2.9%, boosting optimism for a Fed rate cut in September. The Nasdaq and Topix surged 12% and 22%, respectively. UK job creation exceeded expectations, hinting at further Bank of England rate cuts.

Monday saw major sell-offs in popular trades, with sharp declines in the Nasdaq and USD/JPY. Dovish comments from the Bank of Japan and strong U.S. data later stabilized markets. Uncertainty remains as investors await the Federal Reserve’s next moves.

Central banks are diverging in policy: the Fed left rates unchanged, the Bank of England began easing. Despite this, lower yields driven by weaker growth persist, pushing the 10-year Treasury yield below 4%. Major stock indices declined amid rising recession fears and geopolitical tensions, while the yen strengthened against the dollar.

Global risk aversion has gripped markets as investors sell top tech stocks amid yen outperformance. The Nasdaq and USD/JPY are down 9% and 4.5% from their peaks three weeks ago. Political uncertainty has intensified after President Joe Biden withdrew from the election, making the former President Donald Trump the favorite, yet increasing overall uncertainty.

Despite signs of the US economy losing steam, the dollar remains appealing due to political turmoil in Europe, Trump rising in the polls, and FX weakness in Asia. The UK’s Q1 growth was upgraded to 0.7%, leading the G7. Meanwhile, USD/CNY is under pressure as Chinese bond yields hit two-decade lows.

Political risk premia in Europe fell slightly this week amid French election concerns, but implied volatility remains high. Lower yields and disinflation have propelled US equity benchmarks to record highs.