Risk appetite wanes as the US 10-year yield stretches above the 3% psychological mark. The US stock indices failed to extend gains on Monday, as Friday’s strong jobs report ruled out the expectations that the Federal Reserve (Fed) would slow tightening as a result of heavier pressure on the economy.
Inflation is the only metric that matters for the Fed right now, and tension among investors will likely remain high before Friday’s CPI release in the US. The US CPI is expected to have stabilized near the 8.3% mark in May. Last month’s reading was better than the previous month but not as good as market predictions. A second month disappointment could keep the Fed hawks alert and spoil the rally that the US equity indices recorded during the second half of May.
Good and bad news
A couple of factors play in favour of possible relief on inflation, and they include the softer chip shortage, lower shipping prices and easing fertilizer prices. Also, everybody is very enthusiastic about the fact that China is reopening again – except my friends in Shanghai who are woken up at the middle of the night to get tested.
But energy prices aren’t easing. The barrel of US crude extended gains to $121.50 on Monday, and last week’s announcement that OPEC would pump more oil didn’t help improving the price pressure. A further rise in crude oil seems inevitable after the bears failed the OPEC test last week. On the topside, the next resistance stands at $130 per barrel.
It’s not only the Fed
Today, the Reserve Bank of Australia (RBA) raised the interest rates by 50bps to 0.85% while analysts were expecting an increase to 0.60%.
The European Central Bank (ECB) is expected to deliver a hawkish policy stance on Thursday’s meeting. The Europeans are not expected to raise the rates this week, but rather in July.
What we will see this week is the new economic projections from the ECB that will show the implications of the Ukrainian war, especially via the soaring food and energy prices. The new economic projections should finally confirm that the criteria needed for the ECB to raise its rates are finally met. A part of me is secretly looking for a surprise rate hike this week (hush!)
In the FX, the EURUSD remains under the shadow of a strong dollar, yet the higher possibility of a more hawkish ECB policy offers interesting opportunity to increase long exposure to the euro during price pullbacks.
Gold and Bitcoin on the same boat
Bitcoin tumbled more than 6% to below the $30K mark, and a significant recovery is unlikely if we continue seeing further upside pressure on the US yields front.
The same goes for Gold. The higher US yields pressure the yellow metal lower. The price of an ounce is again below its 200-DMA and has potential to extend weakness toward $1800 mark.