As the US and China continue negotiations in London, European stock markets saw little fluctuation on Tuesday, with traders across Europe awaiting how the key mineral deadlock will develop.
According to CNBC, the pan-European Stoxx 600 index was flat. The London FTSE 100 index rose by 0.4%, while the German DAX index fell by 0.2%. The French CAC 40 index saw a slight increase. Despite the data, no one is really building positions, especially with ongoing trade tensions.
The defense sector is under tremendous pressure, with the Stoxx Aerospace and Defense Index falling by 0.8%, marking the third consecutive day of decline due to increasing uncertainty over rare earth mineral supplies.
In April this year, China took retaliatory measures against US tariffs, restricting the export of key minerals needed for defense technology, impacting Europe's manufacturing and military industries.
The UK labor market is weak, and UK government bonds have risen.
Investors have more to worry about than just trade tensions. Following the release of new labor market data from the UK on Tuesday morning, government bond prices (i.e., gilt-edged bonds) rose across the board.
The Office for National Statistics in the UK reported that the average wage growth rate was 5.3%, below the Reuters forecast of 5.5%. Additionally, the number of job vacancies fell by 7.9% in the three months to April compared to the previous quarter. The economic slowdown indicates that the job market is weakening, raising speculation about a possible easing of monetary tightening policies.
After the data was released, the yield on 10-year UK government bonds fell by 7 basis points, while the yield on 5-year UK government bonds fell by 6 basis points. The yield on 2-year UK government bonds also fell by 7 basis points, and the yield on 30-year UK government bonds fell by 6 basis points. As bond prices rise, yields fall—this is a clear signal that demand for UK government bonds is increasing amid cautious market sentiment.
After Ueda's speech, gold prices rose, metal prices fell, and the yen depreciated.
In the commodities sector, gold prices edged higher. At 08:18 GMT, the gold price was reported at $3,333.89 per ounce, having previously dipped to $3,301.54. US gold futures stabilized at $3,354.70. Ahead of the release of US inflation data this week, gold buying remained steady, which could influence the Fed's next rate decision. As investors avoided risks before potential macroeconomic changes, safe-haven buying slightly increased.
However, the metals market is not universally rising. Silver prices fell by 0.6% to $36.51 per ounce, despite hovering near a 13-year high. Platinum prices dropped by 1.1% to $1,206.42 per ounce, after reaching the highest point since May 2021; palladium prices fell by 1% to $1,063.22 per ounce. The trends in the metals market reflect a generally cautious sentiment in European equity and bond markets.
In Japan, Bank of Japan Governor Kazuo Ueda clearly stated in parliament that the central bank is far from achieving its inflation target. Ueda noted, 'Our short-term policy rate is 0.5%. Overall, with strong downward pressure on the economy, our room for stimulating the economy is very limited.'
This line alone was enough to shake the yen exchange rate, with the yen falling from 144.69 to a low of 145.29 against the dollar, before slightly recovering. Ueda downplayed the likelihood of a recent rate cut but hinted at potential support for the economy, which traders viewed as a signal that there would be no rate hikes in the short term.
Japan has the highest inflation rate among the G7 countries, yet its policy rate remains at the lowest level. Ueda's stance reflects that Japan will eventually need to raise rates, but only if the economic outlook is clear. There are also reports that the Japanese Ministry of Finance may reduce the issuance of ultra-long-term bonds and even buy back some bonds—another reason for the yen losing momentum.
The Bank of Japan is expected to maintain interest rates at its upcoming policy meeting next week, citing 'extremely high uncertainty' in economic forecasts. As investors juggle risks between currencies, bonds, commodities, and geopolitics, the pressure is rapidly increasing.
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