Cavalier Attitudes

Submitted by Michael Every of Rabobank

The combination of surprisingly dovish comments from Fed Chair Powell and the tone of the June FOMC minutes reassured the market about the prospect of some policy stimulus at the end of the month.  In response to questions from Congress men and women, Powell clarified that the stronger than expected US June Labor Report did not shift the Fed’s policy outlook.  Instead he stated that uncertainties about global growth and trade continue to weigh on the outlook. 

From the point of view of investors, up until now the prospect of more cheap money has outweighed both economic and geopolitical risks. On the back of Powell’s remarks yesterday the S&P 500 briefly moved about the 3000 level for the first time, though it closed below. The optimism drawn from the Fed Chair’s remarks seem to wear a little thin towards the end of the European session where stocks closed lower.  While Asian stocks were broadly higher, the strength of the JPY overnight told a more ominous story.  The safe haven JPY is the best performing G10 currency on a 1 day view and USD/JPY is this morning trading back down in the 108.00 area. 

The JPY’s sensitivity to bad news is particularly acute with respect to geopolitics. This morning the UK government issued the statement that “Contrary to international law, three Iranian vessels attempted to impede the passage of a commercial vessel, British Heritage, through the Strait of Hormuz.” After intervention by a British warship, the Iranian vessels backed-off.  On Wednesday Iran President Rouhani warned

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