The week starts on a positive note after the rally we saw in the US stocks before last week’s closing bell. European futures hint at a positive open.
The US 10-year yield stabilized around the 2.75% mark, and the US dollar index is now back to its 50-DMA level, giving some sigh of relief to the FX markets overall.
One interesting thing is that we observe that the equities and bonds stopped moving together since the 10-year yield hit 3% threshold, suggesting that investors started moving capital to less risky bonds if they quit equities, instead of selling everything and sitting on cash. That’s one positive sign in terms of broader risk appetite and should help assessing a bottom near the actual levels.
Data, data, data
But the end of the equity selloff depends on economic data. Released on Friday, the US PCE index fell from 6.6 to 6.3% in April. The personal income rose slightly lower than the previous month, while spending remained stronger than expected. The thing is, if we start seeing a softer income growth, spending won’t – can’t – remain robust. And a softer spending will, finally, have the cooling effect on consumer prices. If that’s the case, the Federal Reserve (Fed) could finally relax into September – following two highly likely 50bp hikes in June and July, and the only expectation of a more relax Fed is enough to give investors a smile after such a sharp downside correction in equity valuations.
Due this week, the NFP number per se is not very important, as the Fed thinks that the US labour market is still too tight. But more importantly, they think that the US inflation is too high. Therefore, the wages growth will again be in focus. Analysts predict a decline from 5.5 to 5.2% in May. If that’s the case, it may be taken as good news for inflation, though lower income means less spending, and less revenue for companies. So, we will certainly see a cool down in the stock selloff, but we are not yet done with the recession talk.
EUR/USD drills above the 1.0750
Weak US dollar, combined with the recent hawkish comments from the European Central Bank (ECB) head Christine Lagarde hinting at the end of the negative rate era in Europe, is now forcing the EURUSD higher. The pair kicks off the week working on the 1.0750 resistance, to extend gains to 1.08, which is the 23.6% minor Fibonacci retracement on the past year selloff, then to 100-DMA, which stands just a touch below the 1.10 mark, to the 1.10 psychological level and to the 1.1084, which is the major 38.2% retracement, and which will, in theory distinguish between the actual yearly negative trend and a bearish reversal. So even with a rise to the 1.10 mark, the EURUSD will still remain in the bearish trend, which makes the 1.10 a fairly reasonable bullish aim.
All this is great, but
There is one thing that preoccupies investors this Monday: rising oil prices. The barrel of US crude trades above the $117 mark as the US driving season is about to kick off, and UK oil giants review their production plans in the North Sea following the announcement of a 25% windfall tax in the UK.
The windfall tax is fundamentally bad news: if oil companies reduce investment due to higher tax, the tighter global supply would keep oil prices upbeat. Thanks, Rishi!
On the geopolitical front, the Europeans meet and meet again to discuss about the sanctions about Russia, but they can’t agree on a Russian energy ban as Hungary continues refusing to walk away from the Russian oil.
On the supply front, OPEC will meet this week, but there is little hope to see OPEC countries announcing anything that would give a relief to the market.
So all in all, it looks like oil prices will remain under a decent positive pressure this week. On the upside, we should see a solid resistance into the $120pb mark, as the high oil prices weigh on sentiment about the economic activity, lower the demand and could slow down the rally. But whether it will keep the upside contained near the $120pb is the million-dollar question.
