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Key takeaways

US investors took the central bank’s inaction in their stride, but in Europe, markets sold off following the European parliamentary elections.

No change yet to US interest rates
The US Federal Reserve (Fed)’s decision to leave rates unchanged on Thursday was not a surprise to markets. Yet Fed watchers noted the change in the accompanying statement, from the previous “lack of further progress” on inflation, to the latest “modest further progress…”. Investors’ latest expectations are for a single cut to interest rates this year, and a further four cuts in 2025. The Fed’s unwillingness to move at its latest meeting might be partially explained by its decision to increase its 2024 forecast for core inflation (which excludes more volatile energy and food prices) from 2.6% to 2.8%, reflecting pricing pressures earlier in the year.

Macron’s gamble unnerves investors
The increase in support for right wing parties at the expense of the centre in the recent European parliamentary elections led to a sell off for both the euro and regional shares. With these parties more vocal about ‘national sovereignty’, some investors are concerned about the risks of less financial discipline in the eurozone. In France, President Emmanuel Macron’s decision to call a snap national election is being viewed as a high-risk gamble. Should he lose, France could have a new president before the Olympics later this summer.

Europe imposes higher tariffs on Chinese electric vehicles
Additional tariffs of up to 38.1% imposed by the European Commission (EC) on imported electric vehicles (EV) from China closely followed moves by the US, where tariffs quadrupled to 100%. The EC estimates that lower-cost Chinese EVs have increased their European market share from less than 1% in 2019 to 8% currently, and might reach 15% by next year according to some estimates. European car manufacturers, led by those in Germany, opposed the EC’s move. With nearly one-third of their sales going to China, German car makers will likely be vulnerable to any retaliatory moves.

Market moves

  • In the US, stock markets reached new highs, but returns were led by tech stocks and therefore very narrowly focused. However, softer US inflation news led to US bond prices rallying.

  • Eurozone shares and bond markets weakened in the face of heightened regional uncertainty.

  • The Japanese yen ended the week at almost a 34-year low against the US dollar. Investors were disappointed the Bank of Japan (BoJ) did not announce a rise in interest rates or government bond purchase activity.

  • In the UK, sterling has been a beneficiary of European political turmoil, and is almost at a two year high against the euro.

What to look out for this week

  • Following the release of UK inflation data on Wednesday, the Bank of England is expected to keep interest rates unchanged. This means no rate cut before July's general election.

  • US May retail sales data on Tuesday and Friday’s release of private sector survey data for June for a range of developed markets, including the US, UK and eurozone, will show how efforts to slow inflation are progressing.

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