Yen rallies as election day is here

European and UK stocks are set to open higher on Thursday, after US stocks reached fresh records on Wednesday. The driver was a surge in expectations for a rate cut from the Federal Reserve in September, which jumped to more than 70%. A sharp decline in the ISM service sector index was recorded for June, which fell to 48.8 from 53.8. The detail of the report added to evidence that the US economy is weakening and thus needs a rate cut from the Fed in the early Autumn: the new orders component slipped to 47.3, the lowest level since late 2022, and the employment component also fell deeper into contraction territory at 46.1 from 47.1 in May.

Yen gets a boost, but it’s not enough to reverse course

There has been a spate of weaker US economic data, as we mentioned yesterday, and this weighed on Treasury yields. The 13bp drop in US Treasury yields has helped the yen to stage a mild rally after falling to historic lows. USD/JPY has backed away from 162.00 and is currently trading around 161.50. It will take more than a weak data point in the US to sustainably boost the yen, however, it could be a step in the right direction.  US markets are closed today for the July 4th holiday.

French deficit widens again, but markets don’t seem to mind

Overall, we expect markets to be quiet on Thursday, the quiet before the potential storm. The UK heads to the polls today, there’s a pre-election French bond auction of 10-year, 9-year and 40-year bonds at 0950 BST. This is worth watching, as it is the longest dated maturity of bonds that France has auctioned for some time, it also comes after France reported a deeper budget deficit for May, at -EUR 113.5bn, vs. -EUR91.6bn. This is the deepest deficit this early in the year for more than 5 years, and comes at a tricky time for France, as markets worry that the new government could weigh on the budget deficit even more. This news has not impacted sentiment towards French assets, French stocks rallied sharply on Wednesday, and are expected to open higher again today. Added to this, the yield spread between France and Germany has continued to narrow, suggesting that voters are less worried about the outcome of the second round of the French parliamentary elections this Sunday. EUR/USD has slipped back from 1.08 after its march higher this week, however, momentum is on the upside and if French assets continue to recover, then EUR/USD may target 1.10.

UK election: No political risk premium here

In the UK, the polls have opened. It is worth noting, that since 22nd May, when PM Rishi Sunak first called this election, the FTSE 100 has fallen approx. 2.5%, however, this is down to some individual stocks that have struggled with internal issues, such as GSK. The FTSE 250, which is more domestically focused, has only declined by 1%. In the shorter term, there have been gains for some of the UKs biggest banks and homebuilders, the latter are rising on the back of expectations that they will receive incentives from the next government to build more homes, while gains for the banks suggests that the market may also think the likely change in government could be good for the UK’s economy.

During the election campaign the pound has mostly traded sideways in a tight range and 10-year Gilt yields are also mostly unchanged since 22nd May, suggesting that there is no political risk premium attached to UK asset prices in this election.

Why are Kier Starmer’s approval ratings so low?

Interestingly, although Labour is set to win an historic landslide according to the last polls, the next prime minister, Kier Starmer, has low approval ratings considering how well his party is expected to perform. According to YouGov, his approval rating is -19, compared to Rishi Sunak’s -42. It will be interesting to see if these improve, if they don’t, he may find his place as leader under threat from others within the Labour party who think they could get higher approval ratings. Thus, while it looks like a dream scenario for Labour in this election, there may be ripples of internal discontent under the surface.

What next for President Biden?

Elsewhere, there is growing speculation that Biden is assessing his options about whether to stay on as the Democratic Presidential nominee. This weekend he has a number of interviews and events that he is scheduled to appear at. This looks like a make-or-break weekend, so if President Biden does not improve his performance, then US politics is likely to come into focus.