Financial markets kicked off the week on a weak note, but not because of the Wagner’s mini, failed, or fake coup over the weekend, but because of the diminishing rate cut bets for the Federal Reserve (Fed) for this year – and the beginning of next year.
Activity on Fed funds futures gives more than 75% chance for another 25bp hike in July, and there is expectation for one more rate hike after that. A set of soft data could do the magic of bad news is good news, and that investors could gently return to longer-term quality bonds, as despite what the Fed says, the end of tightening is certainly near. We saw a heavy slump in open interest in US government bonds as a result of waning dovish bets, but we also see the US 2-year yield slump below a two-month rising trend this morning, as the 10-year yield remains paralyzed a touch below the 3.75% level. The dollar index hardly challenges the 50-100-DMA area, and the stock markets are down, with the S&P500 steadily giving back gains, while MAMAA stocks are seen most vulnerable to a further downside correction due to the recent AI-led rally. Nvidia for example lost almost 4% yesterday, while Tesla fell more than 6%. Small caps, on the other hand, were better bid this Monday, as a sign of a portfolio rebalancing effect before the quarter ends. In this respect, the Russell 2000 index saw support and traded above its 100-DMA despite a broad-basedselloff in big caps, and especially in Big Techs.
The softer US dollar maintains the EURUSD above the 50-DMA, near 1.0875. News from Germany were less than ideal yesterday. The German business climate and expectations deteriorated faster than expected in June, but the Spanish producer prices fell nearly 7% versus a steady deceleration of 4.5% expected by analysts. Slower inflation is the only way to soften the European Central Bank (ECB) rate hike expectations. The Italian PPI, due Wednesday, is expected to print a nearly 10% slump y-o-y in May, and more than 6% slump just in May.
Today, US durable goods orders and house prices will be under close watch while Canada will release the latest set of CPI data. Both headline and core inflation are expected to slow, as a result of continued policy efforts to bring price pressures lower. The dollar-CAD drifts lower, due to a hawkish Bank of Canada (BoC) stance and despite selling pressure in crude oil. The pair is now at the lowest levels since September and is preparing to test the 1.30 support shortly.
Speaking of oil, the barrel of US crude remains steady at around the $70pb level, bulls don’t want to join in given the hawkish central bank stances and rising recession odds, while bears are not willing to push hard, as the geopolitical uncertainties maintain a high level of upside risks.
OPEC lately claimed that the global oil demand would rise to 110 mio barrels per day, with a 23% rise in overall energy demand expected by 2045. That goes perpendicularly against the IEA forecast of higher short-term demand but waning long term demand for oil because of energy transition to greener sources. You believe who you want to believe but the higher the traditional, dirty energy prices, the faster the transition will be.
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