Markets shift into holiday mood

A look at the day ahead in European and global markets by Wayne Cole

It was a mercifully quiet start to the week in Asia, with Japan taking a well-deserved Mountain Day holiday after the Nikkei also tumbled a mountain last week, sending global markets reeling.

If Tokyo were open, futures suggest the Nikkei would be trading about 400 points higher, but still not back to where it was before last Monday’s record fall.

Most other Asian stock markets were firmer, led by a 2% jump in Taiwan, while Wall Street futures were flat.

The dollar was hovering around 147.00 yen, with the unwinding of the yen carry trade appearing complete for now. IMM data released last week showed that net short USDJPY positions now stood at 11,354, down from 184,000 in early July.

Treasury futures were also little changed, while federal funds futures implied a 49% chance of a half-point rate cut in September, after reaching 100% at one point a week ago.

Fed officials have effectively pushed back against talk of a rate cut between meetings, with Fed Governor Michelle Bowman noting over the weekend that inflation is still dangerously above target. But she has softened her usually aggressive tone enough to acknowledge that rates will need to fall gradually if inflation continues to slow.

Markets will know more when U.S. consumer price data is released on Wednesday, with forecasts calling for core annual inflation to fall to 3.2%, the lowest level since April 2021. A reading even lower would have prompted experts to warn again that the Fed was late in cutting rates.

Note: July retail sales on Thursday could surprise on the upside, given the median forecast is +0.3%, but the range is 0.0% to +0.9%. Results from Walmart and Home Depot this week will provide more insight into the state of demand. Weekly jobless claims could also move markets more than usual, given the unexpectedly large decline reported last week.

In geopolitics, the Middle East remains a powder keg, with Israeli Defense Minister Yoav Gallant telling U.S. Defense Secretary Lloyd Austin that Iran was preparing for a full-scale attack on Israel.

The Pentagon took the rare step of publicly revealing that Austin had ordered the deployment of a nuclear-powered guided-missile submarine to the Middle East. The Pentagon added that Austin had also ordered the Abraham Lincoln Strike Group to accelerate its deployment to the region.

Key developments that could influence markets on Monday:

– German Economy Minister Robert Habeck and RWE CEO Markus Krebber speak

(By Wayne Cole; edited by Edmund Klamann)