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Global Markets Await Powell’s Testimony as Fed’s Monetary Policy Dominates

Market Update - Daniel Ang The Accidental Trader Traders Academy International 7

In today’s Daily Market Update, we delve into the recent drift of global equity markets on Monday, June 20, 2023. As the United States celebrated the Juneteenth holiday, market participants eagerly awaited congressional testimony from U.S. Federal Reserve Chair Jerome Powell. With monetary policy dominating the market landscape, investors were hopeful that the Fed’s most aggressive rate increase campaign in decades would soon come to an end. This optimism boosted global stock indices, particularly those dominated by U.S. tech mega-caps that tend to outperform during periods of heightened risk appetite driven by easier monetary policy.

 


Powell’s Testimony and the Impact on U.S. Stock Markets:
Following a week where U.S. stock markets reacted positively to the Fed’s decision to skip a rate increase in June, all eyes were on Fed Chairman Powell’s scheduled testimony on Wednesday and Thursday. Market participants eagerly anticipated his insights, seeking further clarity on the future direction of monetary policy. This testimony carried significant weight, as it had the potential to sway investor sentiment and influence market trends.

Tech Mega-Caps Benefit from Optimism and AI Potential:
The recent weeks witnessed a substantial influx of billions of dollars into the tech sector, with analysts attributing this surge to the perceived productivity-improving potential of artificial intelligence (AI). As hopes for the Fed’s rate increase campaign waned, investors flocked to U.S. tech mega-caps, buoyed by the expectation of easier monetary policy. These companies stood out in global stock indices, reinforcing their dominance during periods of increased risk appetite.

Asian Market Movements:
In Asia, the Nikkei 225 index experienced a decline of 1%, stepping back from a 33-year high. Meanwhile, Chinese blue chips fell 0.9%, and the Hang Seng index slumped 1.2%. Hopes for forceful economic stimulus from Beijing were dashed by the lack of concrete details following a cabinet meeting last Friday. Consequently, market sentiment was affected, resulting in a decline in these indices.

China’s GDP Growth Forecast Cut:
Goldman Sachs recently revised its forecast for China’s GDP growth this year, reducing it from 6.0% to 5.4%. This revision aligns with other major banks’ decisions to slash growth expectations for the world’s second-largest economy. Despite this adjustment, the People’s Bank of China (PBoC) is widely expected to reduce its benchmark loan prime interest rates today, following a similar reduction in medium-term policy loans last week. This move by the PBoC aims to stimulate economic activity and mitigate the potential impact of reduced growth expectations.

Foreign Exchange Market Highlights:
The Dollar Index remained relatively unchanged at 102.33 on Monday, following a 1.2% decline the previous week, marking its most significant drop in five months. In contrast, the British Pound strengthened, trading near its highest level against the Dollar since April 2022, at 1.2814. The expectation that the Bank of England (BoE) would raise interest rates to a 15-year high on Thursday, driven by inflation running four times above its target, bolstered the Pound. Money markets now estimate a 75% chance of a 25-basis point rate rise and a 25% likelihood of a 50 bp hike by the BoE. This anticipation influenced the movement of two-year British government bond yields, which increased by 8 bps to 5.01%, surpassing the previous week’s 15-year high. Moreover, the 10-year British gilt yield stood at 4.462%, forming an inverted yield curve pattern that can sometimes precede recessions.

Currency Movements:
The Japanese Yen weakened against the Dollar, reaching a seven-month low of 141.97, influenced by a dovish stance from the Bank of Japan (BoJ). On the other hand, the Euro remained steady near a five-week high at 1.092 against the Dollar, supported by the hawkish European Central Bank (ECB), which raised rates by a quarter point last week.

Commodities and Digital Assets:
Brent crude oil experienced a minor decline of 0.2%, reaching $76.44 per barrel. Meanwhile, gold prices remained stable at $1,954.39 per ounce. In the digital assets market, most cryptocurrencies saw a rise following the news that Blackrock, the world’s largest asset manager, filed for a Bitcoin ETF last week. Bitcoin (BTC) climbed above the $27K handle after temporarily dipping to as low as $24,756 last Thursday.

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