Quiet Financials Trade Overnight

MACRO FRAME

June’s hiring data (+57,000) missed expectations, though still gives the Fed plenty of space to navigate a rate hike later in the year.

STOCK INDEX FUTURES

Equity index futures were muted overnight in a wave of profit-taking concentrated in tech as investors fade yesterday’s chip rebound and ‘sell the news’ on Samsung’s blockbuster guidance. No major data on the calendar today should leave focus on the geopolitical side, being the NATO summit in Ankara as well as any news regarding the Strait. The Fed’s minutes tomorrow will be the highlight of the week, likely offering more details on policymakers’ thinking over the potential timing/scenarios in which the Fed should raise rates. Semiconductors remain the key swing for the tech rally, with the PHLX semiconductor index facing headwinds in July, highlighting recent pressure in the AI/memory complex. Korea’s SK Hynix plans to raise over $29 billion via ADRs on Nasdaq this week, adding a sizable new supply event and keeping attention on the global chip cycle and AI infrastructure trade.

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Watch point: Equity volatility is being driven by increasingly concentrated bets in tech and semis, and that argues for a deliberate shift toward industrials and broader, real‑economy exposure

CURRENCIES

US DOLLAR: The USD index is little changed at 101.89 in quiet trade overnight for the currencies. The underwhelming US jobs report has led markets to trim 2026 hike expectations: roughly 29 bps of Fed tightening priced by December versus about 38 bps a week ago, leaving attention on inflation signals in upcoming data. Markets are now focused on Wednesday’s FOMC minutes for more detail on the committee’s reaction function under Warsh. The dollar index recently hit a 13‑month peak but has since pulled back; the risk‑reward on further USD upside is no longer a one‑way bet. The dollar is has been driven more by rates and macro factors than geopolitical developments over the last couple of sessions, lower oil prices and direct US-Iran talks would otherwise see a flight away from dollar safety. Mainly, Fed rate expectations will continue to be a dominant driver in determining dollar strength. An unwinding or pushback of rate hike expectations will be bearish for the dollar and near-term yields. With a light US data calendar today, FX volatility is likely to stay capped into the minutes, leaving currencies to trade mostly within recent ranges unless an unexpected headline hits.

Watch point: Recent data has reinforced expectations that Fed policy will move higher before year-end. For now, markets will look to inflation signals for guidance on potential rate-hike timing.

EURO: The euro is little changed at $1.1440. The European Central Bank publishes the account of its June meeting on Thursday, after its 25 bp rate hike that took the deposit rate to 2.25%. Softer-than-expected inflation data and remarks from ECB President Lagarde that were less hawkish than expected have kept a lid on the euro and weighed on rate hike expectations. The outlook for the ECB has two directions: on the hawkish side, elevated volatility, second-round inflation effects, and geopolitical uncertainty point to upside risks in inflation. On the dovish side, if the current energy environment persists, the bank could afford to wait until September, when if offers fresh projections on the economy to decide on the appropriate path for policy. However, given the current environment and previous policy response from the bank, a hawkish bias is likely to persist until policymakers gain a better understanding of the second-round effects of inflation, which may not come until later in the year. Traders are fully priced for a hike in December, though remain favorable to a move upwards at the October meeting. The market is seeing a total of 28 bps of tightening by year-end.

Watch point: A peace deal, restoration of oil flows through the Strait, and easing services inflation are likely to push back tightening expectations, though policy expectations are still biased upwards.

BRITISH POUND: Sterling is little changed at $1.3382. Andy Burnham, the favorite to become the next Prime Minister has committed to the government’s fiscal rules, relieving fears among that he would ramp up spending once in power. For the sterling, political turmoil has likely been priced in leaving upside potential if news is better-than-expected. With oil prices back toward $70bbl, energy‑driven inflation pressure has eased, reducing the urgency for further rate hikes globally, including at the Bank of England. UK money markets now price roughly a 70% chance of just one BoE hike this year, down from expectations of at least one and a good chance of a second only a few weeks ago. Governor Bailey has pushed back against near‑term cuts, saying the BoE is not yet in a position to consider lowering rates, reinforcing a cautious “hold but not cut” stance.

JAPANESE YEN: The yen gained 0.14% to 161.84 yen per dollar, remaining firmly in the intervention danger zone. Speculation about stealth intervention around the July 4 U.S. holiday did not materialize, and some of last week’s yen gains have been unwound, but markets remain wary of a shift toward a more tactical, less‑telegraphed intervention strategy. For the yen bearish pressure in expected to continue in the near-term, hawkish Fed risk and large US–Japan rate differential still dominate, and any intervention is unlikely to change the underlying direction, only volatility. Meanwhile, concerns over inflation stemming from a weak yen are likely to grow, in part because of the BOJ’s delay in raising rates further. The market sees a total of 22 bps of tightening by year-end, with a move expected to come in January of 2027.

Watch point: With the yen sustaining a break above the 160 level, intervention from the government appears to be the greatest near-term risk against further depreciation.

AUSTRALIAN DOLLAR: The Aussie is little changed at $0.6948. Markets are largely expecting the Reserve Bank of Australia to be done with raising rates this year, leaving near-term price direction increasingly driven by market odds on a rate hike from the Fed. Currently, yield differentials are moving in favor of the dollar. The data calendar is once again thin this week for the Aussie. Minutes of the RBA’s June policy meeting showed the board still saw upside risks for inflation and stood ready to raise rates again if needed, having already hiked three times this year. However, members at the RBA were increasingly concerned about the risk of a downturn in the housing market, highlighting the board’s focus on the balance of risks. The recent drop in oil has led investors to pare back bets of another rate hike to just 32%, and to flirt with the idea of cuts as early as mid-2027.

Watch point: While a durable end to the war would alleviate downside risks to growth and moderate inflation pressures, ongoing pass-through into broader prices is likely to be in focus in the RBA’s policy minutes.

TREASURY FUTURES

Yields were little changed across the curve overnight, maintaining a tight range as traders await tomorrow’s Fed minutes. For Treasuries, the flattening in the 2/10 year spread appears to be reflective of a market that is focused on a “higher-for-longer” policy stance rather than on an inflation slowdown. Warsh’s perceived hawkishness has raised confidence that the Fed will tackle the inflation problem, but also raises rate forecasts. Since early February, the spread has halved, consistent with ample demand for longer-term debt and weariness over the near-term policy path from the Fed. However, the relatively soft June jobs report fall in oil prices toward pre-conflict levels have taken some momentum out of rate-hike expectations. Still, the labor market has proven robust and Fed rate hike expectations are more likely to be shaped by inflation signals than labor market data. Meanwhile, the strong rally in US equities recently could prove supportive demand at this week’s auctions, as investors shift profits into lower-risk plays. Consumer spending has remained strong throughout the Iran war and elevated oil prices, a factor likely adding to expectations for rates staying put through the second half of the year. Markets are priced for a move higher in December and see a total of 30 bps of tightening by year-end.

Watch point: The Warsh-led Fed held on rates and signaled broad institutional change. Mainly, markets should expect fewer words from the Fed and less policy signaling, raising near-term rate volatility with incoming data.

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