As European markets prepare for the day ahead, London’s closure for a holiday sets the stage for a relatively quiet session. With little notable activity on the economic calendar, investors are expected to continue riding the wave of optimism that followed Federal Reserve Chair Jerome Powell’s recent dovish remarks regarding the US interest rate outlook.
The global sentiment has been buoyed by Powell’s comments, with both Wall Street and the MSCI World index reaching three-week highs on Friday. Across Asia, the MSCI Asia ex-Japan index surged to its highest level since February 2023, while Chinese stocks exhibited strength following the extended Labour Day break, indicating a shift towards a more positive investor sentiment.
Moreover, signs of a potential rebound in the Chinese economy are emerging. A private gauge revealed expansion in the country’s services activity, albeit at a slower pace. Accelerated growth in new orders and solid business sentiment further bolstered confidence in the region’s economic prospects.
In the US, strong earnings reports and generally optimistic company guidance have contributed to the prevailing market optimism. This sentiment, coupled with the Federal Reserve’s reluctance to raise rates again and softer economic data, has kept expectations of rate cuts later this year alive and well.
Financial conditions both globally and in emerging markets have seen significant easing, reaching their most accommodative levels since March 22, according to Goldman Sachs’ financial conditions indicators.
Looking ahead, a series of Fed speakers are scheduled to address markets this week. Investors eagerly anticipate further confirmation of Powell’s stance, particularly following the release of the benign US jobs report on Friday. While lower US rates could alleviate pressure on most currencies, the impact on the Japanese yen is expected to be minimal due to significant interest rate differentials.
The yen experienced downward pressure on Monday following suspected intervention from Japanese authorities last week, which led to significant fluctuations in the currency’s value. Market participants anticipate further intervention during periods of low liquidity, potentially leading to additional yen buying during Monday’s European session.
Key developments to watch on Monday include Germany and France’s services PMI for April, as well as Eurozone producer prices for March. These indicators could provide further insights into economic conditions and potentially influence market sentiment throughout the day.