This week in the markets: the price of uncertainty

Attention has shifted dramatically from Europe to the US this weekend with markets forced to price in a high level of political and economic uncertainty in the run up to November’s Presidential election.

All eyes on November

The apparent attempt to assassinate former President Trump at the weekend has dramatically shone a spotlight on November’s election. Markets, as ever, have been quick to price in the likely implications of an unwelcome return to 1960s-style political violence.

Building on the uncertainty about the Democrat ticket in the wake of President Biden’s recent TV debate performance, the attack on former President Trump is forcing a reassessment of the likely November election result. That has been reflected in a small rise in the dollar, gains for bitcoin, gold holding onto recent gains and a small fall in long government bonds.

But first, the Fed

Before we get to November, however, the small question of when the Federal Reserve starts to cut US interest rates must be resolved. Following easier than forecast inflation data last week, markets now expect up to two interest rate cuts this year, with the first likely to be delivered in September. Odds on a first cut then rose above 90% as inflation emerged at a lower than expected 3.0%.

While two rate cuts are far fewer than investors were hoping for at the start of the year, they would represent a more dovish turn for monetary policy and markets have responded positively. The Fed has kept rates at between 5.25% and 5.5% all year, the highest level since 2001 and fears are growing that higher for longer rates will start to have a negative impact on growth as we head into 2025.

Giving testimony to Congress last week, Fed chair Jerome Powell said he needed ‘more good data’ before the Fed could confidently cut interest rates. Last week’s consumer price index (CPI) seemed to clear that hurdle.

Meanwhile, on this side of the pond

Over here, the focus continues to be on the new Labour government’s policy agenda and this week we get to see its plans for the next year laid out in the King’s Speech. Top of the list of priorities for Sir Keir Starmer’s new government is getting the UK economy humming again, so we can expect measures to shake up the planning system and encourage housebuilding. There will also be details of the creation of Great British Energy and a National Wealth Fund to direct public money into long term investment.

So far, the markets have given Labour the benefit of the doubt, with the FTSE 100 broadly unchanged since the election just over a week ago and the pound edging higher to around $1.30. This week’s main economic data in the UK will be inflation figures, which are forecast to show a second consecutive month of prices rising at the Bank of England’s 2% target. It remains to be seen whether that will trigger a rate cut at the next meeting of the Monetary Policy Committee on 1 August.

Also on investors’ radar

In a busy week, there’s no shortage of other potentially market moving events. In China, a five-yearly meeting of top officials will be scrutinised for signs of stimulus. The week has already started on the back foot with economic growth emerging at 4.7%, below Beijing’s 5% target as China struggles to emerge from Covid and battles with an ongoing property slump.

Over in Europe, the European Central Bank (ECB) will decide on Thursday whether to follow its recent interest rate cut with more easing this week. The consensus is that it will hold fire and leave rates at 3.75% but restart the cuts in the autumn.

And US earnings season gets into its stride after the banks were, as usual, first out of the blocks last week. The current consensus is for profits to grow in the low double digits in the second quarter and for the full year as a whole.

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