Weekend Market Recap and Fiscal Developments Amid Geopolitical Shifts

Markets

The United States observed Independence Day on Friday, leaving markets closed. European trading saw modest activity, with equities rising 0.8%, Treasury yields edging up 2–3.8 basis points, and the US dollar remaining largely stable. USD/JPY stood out as an outlier, reversing early yen gains throughout the session. The pair edged closer to 162 levels on Monday as yen depreciation intensified, negating earlier payrolls-driven optimism. The EUR/GBP pair closed below the 0.86 support threshold, though technical indicators showed improvement for sterling investors, with critical levels now centered on 0.85.

In the bond market, focus has shifted to higher maturities, driven by ECB officials flagging reduced urgency for consecutive rate hikes amid a Gaza ceasefire and declining oil prices. However, 10-year inflation expectations have stabilized near 2%, signaling constrained potential for further oil-linked yield declines. Analysts suggest long-term yield downside may be cushioned by robust fiscal fundamentals.

US Treasuries opened flat post-holiday as thin trading volumes underscored limited catalysts. Markets moved ahead of no major headlines, though attention turned to Japan’s upward trending long-term yields, which pushed 10- and 20-year bonds toward multi-decade peaks. Analytics predict this steepening dynamic could extend across the Atlantic as global risk appetite remains fragmented amid AI sector consolidation and mixed economic signals. The spotlight shifts to Tuesday’s US Services ISM report, with forecasts anticipating stability (54.1 vs. June’s 54.5). Potential upside risks stem from geopolitical developments and oil price volatility.

News & Views

Germany’s proposed 2027 budget, reviewed by Reuters, projects record net borrowing of €203 billion, up from €196.5 billion previously estimated. Total expenditure rises to €555.4 billion (vs. €543.3 billion in April), with defense outlays climbing to €109 billion in the core budget—supported by Scholz’s special fund. The bloc allocated €54.9 billion additional infrastructure funding and €11.6 billion for Ukraine aid, pushing overall defense spending to €130.1 billion. The revised total surpasses prior investments by €40 billion.

OPEC+ convened virtually to address supply dynamics, voting to incrementally raise production by 188,000 barrels/day starting August 1. Seven cartel members will reassess policy on August 2. Persistent uncertainties remain over Strait of Hormuz transport capacity, despite US-Iran tensions easing following a nuclear cooperation MoU. After a April-July downturn, Brent crude stabilized near $72/barrel as market participants weigh resumed supply flows against regional stability risks.