Franc appreciates despite risk-on mood

Last week saw investors put more risk on the table as Middle East tensions de-escalated following a fragile but so far holding US-brokered peace between Israel and Iran. There was also progress on the trade front: the US and China announced they’ve reached a trade agreement that will help restore the flow of Chinese rare earth metals to the US in exchange for trade concessions. VanEck’s Rare Earth and Strategic Metals ETF jumped nearly 4% and is consolidating gains just below its 200-day moving average (DMA) this morning. Japan and India decided to extend their negotiators’ stays in Washington, raising hopes that the talks are progressing and could lead to more good news in the coming days. Canada rolled back a digital services tax on US companies—imposed just a week earlier—to open the door for softer negotiations. Taiwan said the country made ‘constructive progress’ in the second round of talks, and the EU’s Ursula von der Leyen sounded optimistic that the bloc will find a way to sign a deal to avoid 50% tariffs on European exports to the US.

As such, investors are optimistic and willing to take more risk on their shoulders. The S&P 500 advanced to a fresh record high on Friday, the Nasdaq 100 hit a new record of its own, and the Dow Jones Industrial Average reached its highest levels since March. The Russell 2000—which had plunged nearly 30% after its November peak—has now recovered more than 60% of those losses and is testing its 200-DMA to the upside. US mid-cap stocks have also broken above their 200-DMA, with momentum improving on the back of falling yields and rising dovish Federal Reserve (Fed) bets, despite the Fed’s persistently cautious tone. Chair Powell repeated last week that the Fed is not willing to rush into rate cuts before having a clearer picture of where inflation is headed amid tariff uncertainty. But that went mostly unheard.

In Europe, the Stoxx 600 closed the week on a positive note, ending above both its 50- and 100-DMA, while the FTSE 100 finished just below the 8800-point mark. The Nikkei 225 rallied past the 40,000 level last week on trade optimism and started this week positively as well. However, stocks in China and Hong Kong are still not reacting to the encouraging trade news: both the CSI 300 and the Hang Seng Index are seeing limited demand this Monday, despite the trade truce and better-than-expected PMI data—even though manufacturing activity remained in contraction for a third straight reading.

Overall, market sentiment is upbeat. Investors are pulling back their gold bets, but the Swiss franc remains surprisingly strong and in demand. The USDCHF slipped below the 0.80 mark last Friday and is consolidating under this level —a threshold breached only on rare occasions: once during the European debt crisis in 2011, which forced the Swiss National Bank (SNB) to impose a floor of 1.20 on the EURCHF, and again in January 2015, when the SNB abruptly removed that floor. The fact that the franc's strength persists despite zero rates and broadly positive global market sentiment is a growing concern for the SNB. The franc appears stuck in an appreciation spiral that hurts Swiss exporters. Yet currency intervention is off the table for now, as Switzerland must tread carefully during ongoing trade negotiations with the US—already sensitive after being listed by the US as a potential currency manipulator. So for the time being, Switzerland may have to live with a stronger franc—at least while trade talks continue—and enjoy their discounted summer vacations. But at some point, the franc's strength will need to be addressed to help Swiss economy cope with the loss of competitiveness. The SMI index has been weighed down by tariff uncertainty and franc strength since the beginning of the year, and zero rates have done little to revive investor appetite.

Elsewhere, the US dollar continues to weaken despite trade progress. News that Donald Trump’s so-called ‘beautiful tax bill’ is now headed to the Senate—and, if passed, would add an estimated $3.3 billion to the US debt pile—is undermining appetite for both the dollar and US Treasuries. The 10-year yield briefly rebounded before approaching 4.20% last week.

European investors have increased their incentive to repatriate funds, and the euro is benefiting from sustained appetite for European assets. The EURUSD surpassed the 1.17 mark last week and is consolidating gains above it, despite stronger-than-expected inflation readings from France and Spain on Friday. More inflation data is due today from Germany and Italy, but the eurozone’s aggregate inflation data for June—due tomorrow—is expected to show a 2% print. That would hit the ECB’s target exactly and keep the door open for further support, if needed. The latter remains supportive for the euro.

Other than the European inflation figures and Trump’s tax bill—aimed to pass before the July 4th holiday—the market's attention this week will also turn to the latest US jobs report and a series of final PMI prints. In energy markets, oil prices are worth watching as they give back the Middle East–led gains. WTI crude is sitting on a key Fibonacci support near $65 per barrel—the level that separates the year-to-date bearish trend from a potential medium-term bullish consolidation. Expectations that OPEC may announce a plan to bring more oil to market at its July 6 meeting could give bears the upper hand into the weekend.