May is finally over, but inflation worries, the war, and high energy prices welcome the new month with us.
Yesterday’s meeting between Joe Biden and Jerome Powell reminded investors that inflation is the policymakers’ primary concern, and both Biden and Powell will do anything in their power to fight soaring inflation.
But if only Powell could do something effective! The rising consumer prices are mostly due to the rising energy costs – which are out of Powell’s direct reach.
Oil: The good and the bad
The good news is that the kneejerk reaction in crude oil to European ban of Russian oil imports remained capped near the $120 mark. US crude couldn’t find buyers above the $120 psychological mark, and the latest rally got investors to hurriedly take profit, as a sign that above this level the concerns about the negative impact on demand takes over – despite the news that Shanghai is free after two-month lockdown.
The bad news is, Russia started cutting off the gas of more European countries as a response to the European ban on its oil exports, pointing that they refused to pay the Russian gas in rubles. Gazprom stopped providing oil to Netherlands and Denmark, and dropped a small contract to Germany as well, according to Bloomberg news. The latter pushed the European gas futures up by about 2.5% yesterday, but the fact that we are entering the summer months, where the need for heating will be much less, is temporarily good news. I say ‘temporarily’ because losing the Russian energy, watching OPEC do nothing to increase production, and China reopening will likely throw a floor under any selloff in oil prices, and should keep the downside potential limited. The major support to the actual rally is the 50-DMA level, a touch below the $107 per barrel.
Futures point at positive start to June
US futures hint at a positive start to the month, but the gains are vulnerable to inflation fears, geopolitical tensions, and the positive pressure in energy prices.
In the FX, we see the US dollar rebound with higher US yields. The dollar index rebounded back above the 102 mark this morning, but the upside potential will likely remain limited from here, as 1. the hawkish Federal Reserve (Fed) expectations are fully priced in, the US 10-year breakeven inflation rate fell to 2.6% from 3% earlier this year, meaning that investors have more confidence in Fed’s ability to tame inflation without getting more aggressive on actual policy, and 2. other central banks are also tightening… or thinking about tightening (yes, I am looking at you, Christine!)
Today, the Bank of Canada(BoC) will likely raise its overnight rate by 50bps to 1.50%. The dollar-CAD slipped below its 200-DMA this week, and has potential to extend losses to at least toward the 1.2550 without even damaging the medium-term positive trend. Tighter BoC, high energy prices and improved balance of payments suggest a stronger Loonie in the medium run.