The market awaits Walsh’s speech and non-farm payroll data; South Korean stocks close down 2%, the US dollar strengthens, gold falls another 1%.

The market awaits Walsh’s speech and non-farm payroll data; South Korean stocks close down 2%, the US dollar strengthens, gold falls another 1%.

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Federal Reserve Chairman Waller's speech in Sintra, Portugal is about to take place, coinciding with the imminent release of the U.S. June non-farm payroll report. Market expectations for a Fed rate hike have suddenly heated up, driving the dollar broadly stronger, gold under pressure and retracing, the yen falling to a 40-year low, most Asian currencies under pressure, and the strong rally in global stock markets in the first half of the year now facing a key test.

On Wednesday, Japan's Nikkei 225 index closed up 0.6% at 70,474.96. Korea's KOSPI index closed down 2.04% at 8,303.41. The U.S. dollar index rose 0.2%, following a cumulative gain of 0.6% last quarter. Spot gold fell 1.1% to about $3,966 per ounce. The yen fell to 162.77 per dollar, after hitting a 40-year low earlier this week. Dow futures slid over 80 points, while S&P 500 and Nasdaq 100 futures remained roughly flat.

The yield on U.S. 10-year Treasuries rose 9 basis points on Tuesday, providing broad support for the dollar. David Forrester, senior strategist at Credit Agricole CIB Singapore, said, "The rise in Treasury yields, ahead of Waller's speech today and the non-farm payroll data release tomorrow, has provided comprehensive support for the dollar." The interest rate swaps market currently prices in roughly a 36% chance of a 25 basis-point Fed rate hike at the July meeting, while this probability was nearly zero before Waller took office and shifted the policy focus to price stability.

Waller is scheduled to speak Wednesday at the ECB Forum in Sintra, Portugal, which ECB President Christine Lagarde will also attend. Afterwards, the U.S. June non-farm payroll report, to be released Thursday, will become the next key market focus as investors seek more clues on the interest rate path.

Nikkei 225 index closed up 0.6% at 70,474.96. Japan TOPIX index closed up 0.4% at 4,011.50. Korea's KOSPI index closed down 2.04% at 8,303.41.Dow futures slid over 80 points, while S&P 500 and Nasdaq 100 futures remained roughly flat.The spot dollar index rose 0.1%.The yen fell to 162.77 per dollar, after hitting a 40-year low earlier this week.The Korean won briefly touched 1,559.10 per dollar, approaching last month's low of 1,562.20, which was the weakest level since March 2009.The yield on U.S. 10-year Treasuries rose 9 basis points on Tuesday.Spot gold fell 1.1% to about $3,966 per ounce.Spot silver's intraday loss widened to 2%, at $57.37 per ounce.WTI crude rose 0.3% to $69.73 per barrel.Bitcoin rose 1% to $59,245.51.

Rate Hike Expectations Suddenly Surge, Data and Speech Are Key

Since Waller took office, signals from the Fed's policy have shifted significantly. He established a new task force to comprehensively review the Fed's current strategy, with a clear focus on price stability, which has sparked market expectations of a rate hike. Fed officials voted unanimously last month to keep rates unchanged, with the next policy meeting set for the end of July.

Economic data released this week has not dispelled rate hike concerns. Job openings in May changed little, indicating steady labor demand; June consumer confidence rose slightly, with lower gasoline prices helping offset worries about the job market. Wednesday will also see the release of June ADP employment data, the June ISM manufacturing index, and final global PMI manufacturing data, providing further market signals.

Spot gold fell 1.1% to about $3,966 per ounce.

Yen and Asian Currencies Remain Under Pressure

This week the yen fell below 162, hitting a 40-year low, and market attention on possible Japanese government intervention is rising. Several strategists point out that the 163 level and above will be the next key levels to watch, and believe the Ministry of Finance's tolerance for a weak yen may be higher than during its 2024 intervention.

Japan's top currency official Atsushi Mimura, in an interview, did not reiterate the Ministry of Finance’s usual “ready to take bold forex action at any time” statement, but said that Japan's intervention two months ago was successful and had gained some support from U.S. authorities.

The Korean won is also facing considerable pressure. Moon Dawoon, economist at Korea Investment & Securities, said, "With a strong dollar, it's not surprising that the won has hit a new low." The won briefly touched 1,559.10 a dollar, close to last month’s 1,562.20 low, the weakest since March 2009.

Strong Stock Market Finish in H1, But Q3 Rally Momentum in Doubt

In the first half of this year, global stock markets achieved an exceptionally strong performance not seen in recent years. The Dow Jones Industrial Average rose 8.9%, marking its best first half since 2021; the S&P 500 gained 9.6%; the Nasdaq Composite was up 12.8%; and small-cap Russell 2000 index surged about 22%, its best first half since 1991. Chip and AI-related stocks were the core drivers of this rally, with Micron, Intel, and Advanced Micro Devices together adding about $2 trillion in market value in just the second quarter.

However, into the third quarter, signs of slowing momentum have appeared. Asian equities opened mixed on Wednesday, and index futures indicate losses in Asia may spread to Europe and the U.S.

Christina Woon, portfolio manager at Eastspring Investments, told Bloomberg TV that in the current high valuations and increased market volatility, stock selection will be especially critical this quarter. "My concern is about high market valuations and emerging volatility, so you must be selective and ensure your holdings are not excessively overextended on fundamentals."

Paul Hickey, co-founder of Bespoke Investment Group, expressed a cautious view in an interview with CNBC, saying he remains bullish on the semiconductor sector long-term, but there may be some overheating at present. "This is an AI-driven bull market. If it’s to sustain, tech and semis will continue to lead, but they can't keep up this pace indefinitely. In that sense, they are already a bit overextended, and I recommend a short pause here."

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