Asian stocks were moody, European indices traded lower, and US futures were under pressure on Monday. The rest of the week will likely prove to be challenging both in the US and elsewhere, as central bankers continue pressing economies like lemons, while signs of pain are just before their eyes.
It’s not because the stock markets are driven higher by the AI speculation that the underlying fundamentals are doing well. Average mortgage rates in the US are at the highest levels since the subprime crisis whereas mortgage rates in the UK are again above 6%. The last time we saw these levels was back during Liz Truss mini-budget crisis.
The UK 2-year yield spiked above 5% and has more to rally given the expectation of at least another 125bp hike from the Bank of England (BoE) before the end of this year, the first 25bp being due this Thursday.
What’s funny is that the Reserve Bank of Australia (RBA) minutes released earlier today showed that the RBA rate hike – which was the first hawkish shock in a series of hawkish central bank decisions this month – showed that the decision to hike rates by a surprise 25bp was ‘finely balanced’ and further decisions will depend on inflation outlook and home market. The minutes softened the RBA expectations but will likely undo the pledges of more policy action from the other central banks.
The central bank-induced stress has been well visible in the sovereign bond yields. Besides the sharp rise in UK yields, the US 2-year yield pushes decidedly toward the 5% mark, and the German 2-year yield tops at around 3.20%, the highest levels since the March banking stress. The Stoxx 600 fell more than 1% yesterday and slipped below the 50-DMA. It’s yet too early to call for a peak in equities, both in Europe and across the Atlantic, but there are all the reasons to believe that the rally could not carry on given the morose economic outlook and the aggressive central bank stances.
In China, the People’s Bank of China (PBoC) cut its one- and five-year LPR rates for the first time in ten months in hope to bolster economy, boost inflation and reverse the property crisis. But a targeted fiscal support is most probably needed because slashing rates when investment and consumption weaken due to a confidence crisis may not do much alone. Chinese stocks are under pressure since yesterday as investors were expecting stimulus measures last Friday, and they got nothing instead, as a proof that Xi remains against the Chinese kind of stimulus that we got used to. But that could be the only way to post the kind of Chinese growth numbers that we used to.
European Nat Gas prices are correct, but
The European nat gas prices fell nearly 15% on Monday, after they almost doubled since the start of the month on the back of hot weather and a series of outages. The beginning of this summer reminds us of last summer, when the water levels in European rivers and dams fell alarmingly, causing drought and risk of energy shortage.
Pricewise, we are at about a tenth of last summer’s peak levels, but the extreme weather conditions will likely keep the pressure to the upside, which in return keep inflation worries alive, the European Central Bank (ECB) hawks alert, and the euro bid.
We see the EURUSD’s positive momentum post the ECB meeting gently fade into the 1.10 mark, and we could see some more profit taking before Jerome Powell’s testimony this week, but the medium-term outlook remains positive for the EURUSD.
 minutes released earlier today showed that the RBA rate hike – which was the first hawkish shock in a series of hawkish central bank decisions this month – showed that the decision to hike rates by a surprise 25bp was ‘finely balanced’ and further decisions will depend on inflation outlook and home market. The minutes softened the RBA expectations but will likely undo the pledges of more policy action from the other central banks.){kind=link}