It was quiet session yesterday as the US stock and bond markets remained closed for bank holiday, while the European equities kicked off the week mostly in the positive, especially with the FTSE 100 leading gains in Europe thanks to the rising oil prices.
US crude advanced to the $85pb mark having gained close to 12% just since the start of the year. Supply struggles in some important oil producer countries like Angola, Nigeria and Libya, combined with exceptionally high natural gas prices continue pressuring crude prices higher. Meanwhile, the fact that the Covid-19 pandemic is now being labelled ‘endemic’ throws light to the end of the tunnel and gets the reopening-investors’ hopes up that the restrictions will soon be lifted, leaving the world economy with plenty of more room to recover.
So, the news is good for oil and energy stocks, whereas the steep and sustained rally in prices paves the way toward the $86pb, October and 7-year high, then to the $90pb.
In this respect, the reopening-focused FTSE 100 is now surfing on the positive energy vibe and is finally back to its pre-pandemic levels. The British energy stocks gained near 2.50% yesterday, although the banks were in the red due to the warnings that the rising inflation would eat into their profits even in an appetizing environment of higher interest rates.
Chicken & egg
And equities, especially the cyclical sectors, are the best place to seek a solid hedge against inflation, as they are partly responsible for the rising consumer prices.
Gold?
Rising inflation indirectly weakens the gold’s capacity of hedging against inflation, as it makes it a costly hedge due to the rising real yields. And the higher the inflation, the more aggressive the Fed hawks, and the steeper the rise in inflation.
The yellow metal is hovering a touch above its 50, 100 and 200-DMA zone, between the $1795 and $1810 band and could find it hard to sprint too high from here, as I also believe that the upside potential is somewhat seen capped by the $2000 mark, which also gives cold feet to those who seek safety in unnavigated waters, which makes the concept of safety a bit less safe, probably.
In the FX, well we all have been quite destabilized seeing the US dollar tank, while the expectation was a shiny, glorious year for the dollar. But the abnormally elevated level of long speculative positions is likely responsible for the latest dollar crash. The fundamentals remain supportive of a strong US dollar against most major peers, as the rifts open between an increasingly hawkish Fed and the others.
BoJ: A dream come true
The Bank of Japan raised its price outlook at today’s meeting, but the Japanese officials are rather happy that the global inflationary pressures will finally pull Japan out of a decades-long deflationary cycle. This is almost a dream coming true for Japan, which also means that the BoJ has no rush towards the easy-money policy exit.
The USDJPY should safely continue trending higher, even though the historical data shows that the USDJPY tends to move lower in periods of Fed tightening due to a broad ‘buy the rumour, sell the fact’ behaviour that flips the price action and leads to a softer dollar versus the yen when the tightening actually starts. But for now, the USDJPY is preparing an attempt toward the 116-118 region, with a solid positive trailing 100-dma support, that is near the 113 mark.
