The dollar dipped 0.2% on Monday, reacting to President Biden's decision to step down from the upcoming November election. This move comes amid pressure from Democratic Party members. In contrast, the Mexican peso saw gains, and US stock futures also rose.
In Asia, stocks took a hit as markets in Japan and South Korea opened lower, continuing the downward trend seen in Australia.
Meanwhile, Hong Kong futures indicated a steady start. On a positive note, the People's Bank of China announced a reduction in the seven-day reverse repo rate to 1.7% from 1.8%. This adjustment aims to bolster the economy and may set the stage for this rate to become the new policy benchmark.
Market uncertainty looms
In recent weeks, investors have been increasingly confident about Trump’s chances in the upcoming November election. This sentiment was boosted further after an assassination attempt on the former president. As a result, the dollar saw its first rise in three weeks, while emerging market assets took a hit due to concerns over higher trade tariffs, heightened US-China tensions, and a more relaxed US fiscal policy.
Now, with Biden stepping out of the race, investors face a new dilemma. Should they continue with their current trades? The market is on edge as everyone waits to see whether Vice President Kamala Harris will secure her party’s nomination and if she can build enough support to challenge Trump in the polls.
https://x.com/JoeBiden/status/1815080881981190320
Olga Yangol, head of EM research and strategy at Credit Agricole, commented that while the initial reaction might be to view Biden's withdrawal as negative for the US dollar, it’s too early to make definitive conclusions. Much will depend on Harris's early performance, her choice of a running mate, and the reaction from swing state voters.
Market volatility persists
In the commodities market, both oil and gold saw an uptick in early Monday trading.
On Friday, the S&P 500 fell by 0.7%, marking its worst performance since April. The Nasdaq 100 also suffered, slumping around 1%, while the Russell 2000 Index, which tracks smaller companies, decreased by 0.6%. Ahead of upcoming earnings reports, tech stocks took a hit, and CrowdStrike Holdings Inc. saw a significant drop of up to 15% before recovering some of the losses. The recent IT failure tied to CrowdStrike caused widespread disruptions, including grounded flights.
Tuesday marks the earnings reports for Tesla Inc. and Alphabet Inc., the first among the "Magnificent Seven" to announce their figures. Analysts are particularly interested in Tesla's advancements with robotaxis and Google's parent company, Alphabet's, revenue growth driven by artificial intelligence.
Chris Weston, head of research at Pepperstone Group in Melbourne, noted that the S&P 500 has recently experienced a major shakeout in some heavily concentrated areas. With impending earnings reports for Tesla, Alphabet, and IBM, he advised caution and mentioned he wasn't ready to invest in the S&P 500 or Nasdaq 100 just yet.
China's economic strategy unclear
China’s central bank is expected to keep its one- and five-year loan prime rates steady on Monday, despite weak growth figures in the second quarter.
Over the weekend, President Xi Jinping introduced comprehensive plans aimed at improving the finances of China's debt-ridden local governments. The strategy involves transferring more revenue from the central government to local authorities, including granting them a larger portion of the consumption tax.
However, the specifics on how these plans will be achieved remain unclear. Many of the goals are inherently contradictory, according to Bob Savage, head of markets strategy and insights at BNY Mellon. The ongoing tension between China’s economic growth and stability is affecting the Asia-Pacific markets and financial flows, keeping the Chinese yuan and commodities in focus.
This week, traders will also keep an eye on economic reports from Europe, U.S. second-quarter growth, and various corporate earnings. Additionally, the Bank of Canada is set to announce its rate decision, and the Federal Reserve’s preferred inflation measure is due to be released.