6th July - Independence Day Weekend
- Jul 6
- 4 min read
In terms of geopolitics, the past few days have been dominated by the dichotomy of celebration & mourning rather than negotiation. In Iran, the state funeral for Khamenei senior began on Friday and is expected to run for the week, while in the US the markets were closed on Friday for Independence Day weekend. As a result, the US-Iran talks have been paused, with both sides agreeing not to attack the other during the commemorations. The key point here is that this is a pause and not a breakdown; talks are set to resume on the 11th, so the market can now price a clear path back to the table. This is why we have not seen much of a reaction to the funeral despite the noise surrounding it.
The more important story for markets was OPEC+ announcing a fifth consecutive production increase on Sunday, adding another 188,000 barrels per day into an already loosening market. The result is that oil has come full circle. US Oil is now back around $68 and Brent near $72, both roughly where they sat before the war began back in late February. The entire war premium is now gone. This feeds directly into the theme running through the rest of this post, which is the CPI print on the 14th. This will be the first inflation read to properly capture the oil collapse, and if cheap oil feeds through as expected, the case for the FOMC's hawkish dot-plot begins to fall apart.
Forex
The dominant story remains the yen. We saw the USD/JPY pair hit its highest level since 1986 last week before a suspected intervention, combined with the soft NFP print, dragged it sharply lower. The Japanese government has once again said it stands ready to intervene while refusing to comment on the level, which is the same verbal warning we have heard for weeks now. The question now, as it has been after every previous intervention, is what is to stop the pair from rising back towards those critical levels once again.
The difference this time could be the NFP print. If it removes demand for the USD in the longer term, then the pair could stay at levels more comfortable for the BoJ. However, the rate differential between the two, along with strong fundamentals for the USD outside of the NFP, makes a strong case for us to revisit this same situation in a few weeks. My view is that the differential wins out unless the CPI is soft enough to genuinely shift the Fed's path.
Elsewhere, the pound continues to hold up well. The smooth-looking transition from Starmer to Burnham has removed the political risk premium that was weighing on sterling, and the Bank of England's rate advantage over the ECB gives GBP a floor that the euro simply does not have. The euro itself is steady but uninspiring. Among the commodity currencies, the story is unchanged, with the Canadian dollar remaining the clearest loser from the oil collapse, pinned by crude returning to pre-war levels. The Aussie and Kiwi are leaning on the risk-on tone rather than anything of their own.
Indices
With US markets closed on Friday, the read here comes from the futures, and the signal for today is risk-on. We saw the Nasdaq pointing up around 1%, the S&P up 0.35%, and the Dow broadly flat. This is a continuation of the "bad news is good news" reaction to Thursday's soft NFP, with the receding rate-hike threat supporting the tech names.
The interesting part is how this squares with Thursday's session, which closed deeply split. The Dow finished at a record on the back of value names, while the Nasdaq fell around 2% on renewed AI-spending concerns after the OpenAI and Meta news. So we have two forces pulling on tech at once: the lower-rates tailwind that helps it, against the AI-spending fears that hurt it. Which one wins out as full volume returns today is the key question for the rotation. My honest view is that the balloon is still deflating slowly rather than getting ready to reinflate. The AI-spending concern is a genuine fundamental issue and not just sentiment, and I do not think one dovish jobs print is enough to resolve it.
Precious Metals
The metals are consolidating after finally receiving the catalyst they needed. Gold pushed towards $4,100 on Thursday as the soft NFP pulled yields and the dollar lower, and it has continued higher since. Silver is sitting around $61 to $62 and needs to return towards the $70 level to really prove there has been a longer term change in narrative.
For months, the rate-hike fear overwhelmed everything, but the soft NFP has taken a September hike off the table and handed gold its first genuine tailwind in weeks. However, just one print will most likely not be enough to turn the tide permanently. Gold is still trading under the 200-day EMA, and we would need to see a longer-term move before we can consider the downward trend broken. As always with markets, and as I have said before, it is better to jump on a trend than catch a falling knife. The next key release is the US CPI print on the 14th, and another dovish print there could be the genuine trigger to open the rate-cut channel the metals have been craving all year.
This Week's Market Drivers
Iran Negotiations - These will be on hold for most of the week. If there is some form of provocation or disagreement before the two parties next meet, we could see markets affected.
US CPI Build Up - There are no real significant news events this week, so the US markets will be turning their focus to next week's CPI print on the 14th of July. There may well be some profit-taking or risk management towards the end of the week in anticipation.
NZD Interest Rate Decision - This will affect the NZD and maybe the AUD, but outside of this, other currencies will not be directly affected. Surprising rate changes or unexpected comments from the RBNZ will have a significant effect on the NZD.
Comments