Morning Bid: Bets mount for US rate cut, UK political shake up

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

It’s been a generally upbeat day so far in Asia as softer U.S. data burnished the case for a September rate cut from the Federal Reserve.

The main event in Europe will be the UK election, where the only real unknown is how super Labour’s majority will be. The bookies are odds on for Labour and even Tory ministers have conceded they are heading for a record thumping.

It is possible that tactical voting could relegate the Conservatives to third place, which would make the centrist Liberal Democrats the main opposition and change the traditional balance of power in Parliament. It’s the opposition that gets to ask questions in Parliament and a centrist agenda would likely be vastly different to the typical right-wing one.

Markets seem unfazed by the likely change of power with steady and sterling near a three-week high on the dollar. The Tories’ reputation for economic management was so badly tarnished by the bond market rout that followed Liz Truss’s madcap budget, that Labour no longer seem fiscally scary.

Indeed, Starmer has gone out of his way to appear boringly sober on spending and taxes precisely not to spook the horses, and it’s hard to find a left-leaning policy in the Labour manifesto.

On the prospect of a September rate cut by the Fed, futures now put the chance at 74%, from 65% before the softer data, helping pull 10-year yields down 8 basis points. The Treasury cash market is closed for the July 4 holidays, but futures imply the 10-year yield is holding at 4.35%.

Though it is worth noting the surprising weakness seen in the ISM survey was a complete contradiction of the strength seen in the PMI measure of the same service sector. The ISM used to have a better correlation to the economy but that has broken down somewhat since the pandemic and this report may overstate the slowdown.

Japan’s broad index has cleared its 1989 peak to reach a record peak led by banks and autos, while Taiwan’s main index also hit all-time highs fuelled by the current love affair with all things AI. Taiwan Semiconductor Manufacturing Co (TSMC) cleared T$1,000 for the first time to be up 70% for the year so far.

Key developments that could influence markets on Thursday:

– EU construction and UK PMIs for June, German industrial orders for May

– Appearances by ECB economist Lane, ECB board members Cipollone and McCaul

(By Wayne Cole; Editing by Jacqueline Wong)