Global markets are on edge ahead of a key speech by Federal Reserve Chair Jerome Powell in Sintra, Portugal, and the imminent release of the US non-farm payrolls report for June. The heightened anticipation for further Fed interest rate hikes has fueled a broad rally in the US dollar, pressured gold prices, sent the Japanese yen to a fresh four-decade low, and weighed on Asian currencies, putting the strong first-half rally in global equities to a crucial test.
On Wednesday, Japan's Nikkei 225 index closed 0.6% higher at 70,474.96 points. South Korea's KOSPI index fell 2.04% to close at 8,303.41 points. The US Dollar Index rose 0.2%, building on a 0.6% gain for the previous quarter. Spot gold fell 1.1% to approximately $1,966 per ounce. The yen weakened to 162.77 per US dollar, after touching a 40-year low earlier in the week. Dow Jones futures slipped over 80 points, while S&P 500 and Nasdaq 100 futures were largely flat.
Rising Yields Underpin the Dollar
A significant 9-basis-point jump in the US 10-year Treasury yield on Tuesday provided broad support for the greenback. According to David Forrester, Senior Strategist at Crédit Agricole CIB in Singapore, "The move higher in Treasury yields is providing broad-based support for the dollar ahead of Powell's speech today and the payrolls data tomorrow." Interest rate swaps markets are now pricing in roughly a 36% probability of a 25-basis-point rate hike at the Fed's July meeting, a probability that was nearly zero before Powell took office and shifted the policy focus toward price stability.
Powell is scheduled to speak at the European Central Bank's forum in Sintra on Wednesday, where ECB President Christine Lagarde will also deliver remarks. Following that, the US June jobs report on Thursday becomes the next major focal point for markets, as investors search for more clues on the path for interest rates.
Key Market Levels and Movements
Japan's Topix index closed 0.4% higher at 4,011.50 points. The US Dollar Spot Index edged up 0.1%. The South Korean won touched 1,559.10 per dollar, approaching last month's low of 1,562.20, its weakest level since March 2009. Spot silver extended its losses for the day, falling 2% to $57.37 per ounce. WTI crude oil rose 0.3% to $69.73 per barrel. Bitcoin gained 1% to $59,245.51.
Inflation Fight Drives Rate Expectations
Since Powell's appointment, the Federal Reserve's policy signals have shifted notably. His initiation of a comprehensive review of the Fed's current strategy through a new task force, with a clear focus on price stability, has ignited market expectations for rate hikes. Fed officials voted unanimously to hold rates steady last month, with the next policy meeting scheduled for late July.
Economic data released this week has done little to ease market concerns about tightening. Job openings in May changed little, indicating stable labor demand, while consumer confidence edged higher in June as lower gasoline prices helped offset job market worries. Further signals are expected from the June ADP employment report, the ISM Manufacturing Index, and final global manufacturing PMI data due on Wednesday.
Asian Currencies Under Persistent Pressure
The Japanese yen broke through the 162 level this week, hitting a 40-year low, keeping market focus on potential intervention by Japanese authorities. Several strategists noted that the 163 level and beyond are the next key levels to watch, suggesting the Ministry of Finance's tolerance for a weaker yen may be higher than during the intervention period in 2024.
In an interview, Japan's top currency official, Atsushi Mimura, did not reiterate the ministry's standard line of being "ready to take bold action in the foreign exchange market," but stated that Japan's currency intervention two months ago was successful and had received some support from US authorities.
The South Korean won is also under significant pressure. "It's not surprising to see the won hitting a new low in the face of a strong dollar," said Moon Dawoon, an economist at Korea Investment & Securities. The won touched 1,559.10 per dollar, nearing last month's low of 1,562.20, its weakest point since March 2009.
Equity Rally Faces a Third-Quarter Test
Global stock markets delivered a remarkably strong performance in the first half of the year. The Dow Jones Industrial Average rose 8.9%, its best first half since 2021. The S&P 500 gained 9.6%, while the Nasdaq Composite jumped 12.8%. The small-cap Russell 2000 index surged roughly 22%, its best first-half performance since 1991. Chipmakers and AI-related stocks were the core drivers of the rally; in the second quarter alone, the combined market value of Micron, Intel, and Advanced Micro Devices increased by approximately $2 trillion.
However, as the third quarter begins, the momentum appears to be cooling. Asian shares opened mixed on Wednesday, and equity futures point to potential weakness spreading to US and European markets.
Christina Woon, a portfolio manager at Eastspring Investments, noted in an interview that stock selection will be particularly crucial this quarter given elevated valuations and rising market volatility. "My concern is the high valuation of the market and the volatility that has come in. You have to be very selective and make sure that the stocks you own are not overstretched fundamentally."
Paul Hickey, co-founder of Bespoke Investment Group, also expressed a cautious stance, stating that while he remains bullish on the semiconductor sector long-term, it may be overheated currently. "This is an AI-driven bull market. If the bull market is going to continue, tech and semiconductors are going to lead it, but they can't keep going at this pace. To that extent, they are a little bit extended, and I would like to see them take a bit of a breather here."
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