Independence Day: chip stocks and the yen recover

There is a positive tone to markets to end the week. A mixture of relief post the payrolls data, a reversal of the sell-off in the chip stocks and more volatility in the yen are the main narratives today. The US markets will be closed, which means either markets will be extremely quiet, or price volatility could surge later today on thin volumes.

Here are three developments that are key for markets as we wrap up another week.

1, Shifting Fed expectations

A sharp slowdown in US payrolls for last month, and a fall in the unemployment rate caused by a drop in the participation rate has caused traders to scale back expectations that rates will rise in the US later this year.

There is now virtually no chance of a rate hike in July, expectations have fallen from near 40% to 17% on the back of the data, according to the CME’s Fedwatch tool. There is now less than 50% chance of a rate hike by December, before payrolls there was a 50% chance of two hikes by the end of the year.

The weaker payrolls is having a broad based impact on the market, including stocks and forex.

2, Tech stocks make a recovery

A reduced chance of rate hikes tends to benefit growth stocks, as they reduce borrowing costs and increase the current value of future profits. This can be a powerful driver of stock price growth. This recalibration has helped stocks to recover in Asia. The South Korean Kospi has jumped more than 5%, although it is still nursing an 8% weekly loss. Today’s recovery rally was driven by SK Hynix, which rose by more than 10%.

The selloff was precipitated by fears about hyperscalers’ capex plans, after Meta announced that it was thinking about building a cloud business to sell AI compute. Meta clarified this by saying that its AI agents project had not progressed as expected, which means that they are left with compute they don’t need. This led to broader fears that the capex boom has peaked, which could hit chip makers and memory stocks, in particular.

We believe that the selloff would have been much worse if it was Microsoft or Alphabet that had announced it had too much AI compute, and the fact it is only Meta so far, could be absorbed by the market. This is why chip stocks have rebounded as we move into the end of the week.

This means that the next major test for markets will be earnings reports from the Magnificent 7, which are released later this month, and in particular, their capex plans for the year ahead.

After slipping on Thursday, we expect the Nasdaq could play catch up on Monday. Strong PMI readings for June are also helping the market mood in Europe.

3, The yen: intervention risks

The BOJ planned their FX intervention to boost the yen with perfection on Thursday. The earlier decline in USD/JPY was given a helping hand after the weak payrolls report. There have been reports of more intervention today, and USD/JPY is back below 161, which is a much more comfortable position for the BOJ. So far, the intervention to stem yen weakness has been orderly and has not caused excess volatility in yen crosses.

Chart 1: USD/JPY 5-day chart

Source: XTB