Debt ceiling talks in the US led to some progress, but no deal was reached yesterday. The two sides are apparently close in some areas – they both want to avoid a default – but the Republicans need ‘some movement or some fundamental change’ on the White House deck. Republicans want to slash spending over as long as possible, while Democrats offer little cuts over a couple of years. But the time is ticking louder as the US Treasury’s General Account goes south at a decent pace, and the US will soon run out of money to pay its bills.
And even though there is a strong belief that the US politicians are not foolish to trigger a self-induced economic crisis and that they will reach a deal just before time, appetite in risk assets looks weakened. Both the S&P 500 and Nasdaq lost more than 1% yesterday, while the US 2-year yield spiked to 4.40%, though it’s sharply lower this morning. Gold somehow struggles gathering positive momentum, and even the Swiss franc doesn’t benefit from safe haven inflows, as the US dollar is where investors seek refuge – as absurd as it sounds.
Watch out, you bears
Crude oil performed well on Tuesday despite the US debt ceiling shenanigans, as the Saudi Prince Abdulaziz bin Salman warned oil bears to watch out. The prince said speculators will be ouching ‘as they ouched in April’, that he doesn’t need to show his cards because he is not a poker player, but that he would just tell them to watch out.
In summary, bin Salman gave a clear hint that OPEC is preparing to announce another output cut when it meets at the beginning of June.
US crude jumped more than 2% yesterday after his warnings. There is a good chance that the oil bears will gently turn neutral into the OPEC announcement, and that we will see the price of a barrel test the 50 and 100-DMA to the upside.
But it’s important to note that any OPEC-induced boost to oil prices will likely remain short lived. The 200-DMA, which stands a touch below the $80pb level, will likely continue act as a solid resistance to any rally in the short run.
UK inflation slows, but less than expected
In May, both manufacturing and services PMI were lower than expected and lower than the previous readings in Britain. Yet, service-sector companies reported the fastest increase in cost pressures in 3 months.
Released this morning, the latest CPI fell less than expected by analysts while core inflation spiked to 6.8% unexpectedly, hinting that the Bank of England (BoE) will unlikely see inflation slump as fast as it expects in the second half of the year, and more rate hikes could be needed in the UK.
But maybe not in New Zealand. Even though the Reserve Bank of New Zealand raised interest rates to the highest levels in more than 14 years pointing at inflation that ‘remains too high’, the bank’s forecasts signaled that its tightening cycle has peaked amid an unexpected GDP contraction of 0.6% in Q4 of 2022 and a subdued near-term outlook for activity. The kiwi-dollar took a dive following the decision and is preparing to test the 200-DMA.