On Thursday, traders in Europe attempted to rescue the stock markets from a tech-driven decline, with all eyes focused on whether the European Central Bank would indicate that September is the next likely month for rate cuts.

The day was already rather busy.

Amidst speculations of a prolonged intervention, the Japanese yen reached a six-week high. Meanwhile, the equities markets (.MIWD00000PUS), opens new tab, remained unstable following concerns over chipmaker tariffs that caused the Nasdaq to have its worst day since December 2022 on Wednesday.

Bond markets were largely stable, and the euro was holding close to a four-month high versus an atypically weak dollar before the ECB meeting, where the focus was all on when the bank will lower rates next. The euro was trading at $1.0930.

BNP Paribas analyst Luca Pennarola stated that “barring any shocks” September was the bank’s favoured timing for the next rate decrease because the policymakers had not been defying existing market expectations.

His colleague Mariana Monteiro noted that given the growing disagreement regarding a possibly faltering economic recovery but still stubborn pockets of inflation, it will be crucial to find out if Thursday’s decision—in which rates are likely to remain unchanged—will be unanimous.

Returning to the foreign exchange market, the US dollar was hovering at its lowest point in the last four months relative to a basket of other currencies.

The argument for the September cut in the U.S. has been strengthened by remarks made by Federal Reserve officials. Thus, gold was trading close to its most recent record highs.

European equities were struggling to maintain their gains as the STOXX 600 was poised to end a run of three straight losses. The benchmark index had a 1% increase thanks to the oil and gas industry, which followed rising crude prices.

After plunging 4.4% on Wednesday, the worst day for tech since December 2022, tech was down 0.75% once again in response to a report indicating that the US was mulling stricter export restrictions on sophisticated semiconductor technology to China.

A sub-index of IT equities in MSCI’s largest index of Asia-Pacific shares outside of Japan fell 2.5% last night. Taiwan equities dropped 2%, and tech-heavy South Korean shares lost 1.5%.

The strong decline in semiconductor stocks and the strength of the yen caused Japan’s Nikkei, to fall more than 2%.

“As investors become concerned about stretched positioning, this volatility spike is now leading to some broader risk reduction,” Ben Bennett, an Asia-Pacific investment strategist at Legal & General Investment Management, stated.

The Republican presidential candidate Donald Trump’s statement on Wednesday that Taiwan “did take about 100% of our chip business” and that the country should pay for its defence as it gives nothing to the United States further hurt attitude towards riskier investments.

As investors expected policy updates from a significant leadership meeting in Beijing, China equities had faltered. The tech sector, finished down, while the Shanghai Composite index, made a late push to end up 0.55%.

The dollar index, which compares the value of the US dollar to six other currencies, was up 0.1% at 103.78 on Wednesday, not far from the four-month low of 103.64 that it had touched.

Following a sharp increase on Wednesday that gave traders reason to believe Japanese authorities were once again intervening in the market to support the currency, the yen hit a six-week high against the dollar at 155.375 in early trading. It was last at 156.

Tokyo may have purchased roughly 6 trillion yen last week, according to statistics from the Bank of Japan, to help the weak yen rise beyond the 38-year lows it has been stuck around since the beginning of the month.

Because of the significant interest rate differential between the US and Japan, the yen has lost 9.5% of its value versus the US dollar this year. This has created a profitable opportunity for traders to engage in carry trading, in which they borrow the yen at cheap interest rates and use it to invest in dollar-priced assets for a larger return.

Analysts, however, predicted that traders might sell part of their holdings as a result of Tokyo’s alleged actions last week.

“It feels like the tide is shifting a little here and it’s generating some discomfort for yen funded carry traders,” said James Athey fixed income portfolio manager at Marlborough Investment Management.

In commodities, oil prices continued to increase, with U.S. West Texas Intermediate (WTI) crude rising 0.7% to $83.43, and Brent futures up 0.4% to $85.45 a barrel. Gold was up 0.5% at $2,469 per ounce, just below the record high of $2,483.60 it hit on Wednesday.

(Adapted from TheGlobeAndMail.com)

Categories: Economy & Finance, Regulations & Legal, Strategy