• Markets continue to recover led by the Nikkei 225 index

• BoJ comments result in yen underperformance

• Light calendar again today, focus on geopolitics

• Kiwi benefits from strong labour market data

The positive momentum persisted yesterday as the key US stock indices finished in the green, recovering a tad from Monday’s lows. Euro/dollar continues to drift lower at the time of writing with the 10-year US Treasury yield hovering around the 3.9% level.

But the Nikkei 225 index is leading the recovery with another strong jump recorded today following comments from BoJ deputy Governor Uchida earlier today that “the BoJ won’t hike rates when markets are unstable”. Dollar/yen has responded by climbing above a key technical level, potentially opening the door to another upleg towards the 150-yen level.

The Nikkei 225 index is leading the recovery with another strong jump recorded today

To be fair, little has changed from last week when the market rout commenced on the back of increased fears of a US recession. Maybe the Atlanta Fed GDPNow tracker printing at 2.9% for Q3 has forced the market to reexamine its assessment of the short-term outlook of the US economy.

More importantly, expectations for a more aggressive Fed strategy going forward might have inspired confidence in equity investors that the Fed will come to the rescue if the market rout results in a fully-fledged market crash.

The market is currently pricing in 103bps of easing during 2024 with a 65% chance for a 50bps rate cut at the September meeting. Interestingly, most Fed members have opted to stay on the sidelines with only Goolsbee and Daly being on the wires this week and making reassuring comments. One would have expected a more forceful reaction from the Fed, highlighting its willingness to do whatever it takes.

The market is currently pricing in 103bps of easing during 2024 with a 65% chance for a 50bps rate cut at the September meeting.

The calendar remains light, allowing other events like geopolitics to come to the foreground. The developments in the Middle East are not positive as Iran and its allies are apparently preparing for a retaliatory reaction to the recent assassination of a Hamas official by Israel.

Iran and its allies are apparently preparing for a retaliatory reaction to the recent assassination of a Hamas official

While Iran has already reassured Europeans that it doesn’t want a full-scale war, an open conflict with Israel is bound to impact the overall market appetite and push oil prices higher. Having said that, one has to acknowledge that the oil market has been reacting in a rather mature way recently with WTI oil futures hovering at the lowest level since early February.

The RBNZ is preparing for next week’s rate setting meeting and despite the overall negative market sentiment, the data remains strong. The labour market report for the second quarter of 2024, published during the Asian session, surprised to the upside with the focus now turning to tomorrow’s RBNZ inflation expectations index. Another strong print will most likely negate expectations for a dovish shift on August 14.