Volatility increased mid-July after a failed assassination attempt on Trump at a rally in Michigan, this accelerated the “Trump trades” of weaker USD and steeper curve, that narrative was swiftly hijacked as President Biden, after much speculation, finally stepped aside for his Vice-President, Harris, to lead the Democrat ticket into November. The sudden momentum of fundraising, and improved polling in swing states towards Harris has once again changed the odds of who is POTUS come January 25. Politics was also in Europe, with the results of elections in France and the UK. Although, neither made a short-term impact on the markets, longer-term fiscal consequences are likely. Both elections saw the left side of centre taking the prize, mostly as a reaction to the incumbents. However, in France, there was also a mobilisation against the favourable results of the right-wing RN party in the recent European parliamentary elections.
The real drama in rates unfolded at the end of the month when the BoJ raised rates by more than expected and pledged to halve their QE programme over the next 18 months. These decisions pushed a strengthening of the JPY which was further accelerated when the Fed kept rates at their high but gave the green light for a September cut. The slowly weakening US data, especially the ISM index, has increased fear in the market that the soft landing is vulnerable to being much harder. The unwinding of the USD-JPY “carry” trade has ramifications for a wide range of asset prices and liquidity, and the level of nervousness that has picked up into month end is now at a point not seen for some time.
The US 10y closed the month 37.9bps lower and 5s-30s swap was 16.6bps steeper.
