Why July 24 was a big Macro month?
Changes in Global macro and their potential implications
July was a pivotal month from a macro perspective with key developments across the realms of politics, policies and geopolitics.
The attempt on Donald Trump’s life changed US election dynamics
It initially prompted a big boost to the Trump campaign and even had big tech switching from their historical Democrat allegiances.
It brought the MAGA trade to the fore prompting a rotation from big tech to US domestic companies - captured via the Dow and Russell 2k.
However with Kamala Harris’s uncontested nomination and large initial fund raising, it brings a new dynamic where Trump becomes the old campaigner pushing 80. Her economic thinking is largely unknown but the presumption would be for a left-leaning bias.
The Chinese held their 3rd plenum (5 yr economic strategy meet)
This meet held after a delay of almost a year, had expectations built into how current economic issues would be addressed.
It however lacked in any clear details or direction except an emphasis on self sufficiency and leadership in strategic sectors especially technology.
Narratives and anecdotes from the supply chain suggest a doubling down on manufacturing leadership - likely EVs, Greentech, Semis, Electronics.
Key central banks (FED, BoJ, BoE) do a 180 degree switch
All three central bank meetings happened in the same week and have resulted in monetary policy directions seeing a 180 degrees switch.
The Federal Reserve (FED) sees inflation as having eased over the year leaving the door open for rate cuts starting September. The Bank of England (BoE) actually went a step further and cut rates in its meeting.
The Bank of Japan (BoJ) went the other way by raising their interest rate band to 0.25% (from 0.1%) and outlining a plan to unwind its gigantic decade long bond buying program.
These decisions led to a massive unwinding of the prevalent trade of funding everything via short Yen positions. July price action in USDJPY is one of the biggest seen in currencies where literally 50% of the up-move from 130 to 160 from Jan ‘23 to Jun’24 was reversed within a month.
Bonds rally …finally
The FED signaling along with a weak jobs report prompted a massive easing of bond yields. A 2 year long hardening of yields (from 2.6% to 5%) on the US 10Yr bond seems to have eased to half of that (3.8%)
This would actually be a source of relief for banks and institutions facing large MTM losses on their treasury portfolios over the past 2 years.
US govt bonds are also the primary collateral for global derivatives and hence a fall in yields will boost the value of that collateral.
Re-emergence of geopolitical conflict
Geopolitics re-emerged as Israel ratcheted up the offence, setting up the possibility for a multi-front conflict in the Middle East. Such a war would have the odds stacked against Israel without direct US support.
Turkey’s threat to invade Israel is of particular note. It is a member of NATO and the most powerful military in the region. A wider scale war with NATO involvement, will bring Turkey to a moment of truth.
It is difficult to recall a confluence of so many macro events in such a short period. Borrowing the cliched phrase - “There are decades where nothing happens; and there are weeks when decades happen”.
Financial markets globally across asset classes have been pushed into a state of disequilibrium which usually implies chances of heightened volatility. The ability of Indian financial markets to weather this period and even damp down the volatility will define their underlying strength and depth.