So, what do we know?
(A forex, index, and commodity market review)
Global markets were mixed last week ahead of the key interest rate decisions due out this Wednesday & Thursday. Investors we given a nasty jolt last week by unexpected hikes in official rates by both the Canadian and Australian central banks, where no hike was the consensus. Will the Federal Reserve surprise the markets and follow suit?,
Weekly change (amount change and percentage change on the week)
FTSE -44 -0.59%
DAX -101 -0.63%
DOW +114 +0.34%
S&P +16 +0.39%
NASDQ +18 +0.14%
NIKKEI +740 +2.35%
Hang Seng +440 +2.32%
US markets eked out small gains despite the negative impact of the surprise hike in interest rates from the Canadian and Australian central banks last week. Trading volumes were particularly light, as investors await the key interest rate decision from the Federal Reserve this Wednesday. In the lowest daily volume since last October, the S&P500 managed to post modest gains Friday, bringing a gain of 0.4% for the week.
Despite the low volume, Friday was an important milestone for the closely followed S&P500 with an intraday high that signifies a bull market, as the index rallies 20% from its lows posted on 17th October last year. Whilst the intraday high was not maintained by the close, the S&P500 has put in a surprising performance in the context of rapidly rising prices and rapidly rising interest rates.
Sentiment has been pulled back and forth over the past week with a surprise hike in interest rates by both the Bank of Australia and the Bank of Canada. Normally another central bank taking such action would have little effect on the US markets but with Vix at rock bottom, markets were sensitive to these two surprise moves.
The Bank of Canada had paused rates coming into last week’s meeting and was expected to keep rates on hold. The rise in official rates in Canada and Australia spooked the US markets and bond yields shot up as prices fell in anticipation the Fed would raise rates in the July FOMC meeting. Investors also trimmed their bets on rate cuts; just four weeks ago forward rates implied cuts of .8% from the current 5 to 5.25% band. From the same Fed Watch Tool, interest rates are now expected to rise in the July meeting and fall back to current levels by year end. As we have always said, interest rate expectations are very fluid and change daily.
A surprise rise in unemployment claims last Thursday buoyed the markets as investors optimistically assumed this would give the Federal Reserve good reason to pause any rate rises. This is not the real story as investors now expect rates to tick up and then tick down to current levels by year end. If the US sustains a rebound in consumer prices like Canada did in April, then the outlook for US interest rates would undoubtedly firm again. This would have a serious impact on all US assets and the US Dollar. There also may be wider implications because another unwanted rate rise might trigger another mini credit crunch in some of the smaller regional banks, as was the case in Mid March.
European equities were weaker than their US counterparts, as Services activity in the Eurozone fell. Q1 GDP in the Eurozone was also revised lower to minus 0.1% from zero. This follows on from a minus 0.1% reading in Q4 last year. Technically this means that the Eurozone is or was in a recession.
EURUSD +0.35 +0.33%
GBPUSD +1.32 +1.06%
USDJPY -0.57 -0.41%
The Euro lost more ground to Sterling as interest rate differentials played into Sterling’s hand. Weaker historical growth and faltering industrial production in both Germany and Italy, two of the blocks largest economies, resulted in the Euro falling to its lowest level against sterling since late August last year, before the ignominious Truss administration.
The US Dollar Index, whilst 0.45%weaker against a basket of currencies, traders were sitting on their hands ahead of the FOMC rate decision this Wednesday. Its not this week’s decision that matters, assuming the Fed keep rates on hold, but what the Fed say about future rate rises. In this context the Fed will determine the outlook for the US Dollar until the next meeting on July 26th.
Gold +12 +0.61%
UK OIL -1.51 -1.97%
US OIL -1.58 -2.19%
Gold is burdened by expectation as the news over the past few months that some central banks have been building gold reserves to de-dollarise the global economy. Retail investors and speculators had added much froth to the market but with the rally in the US Dollar since early may, traders have been nursing losses as the Dollar strength caused Gold to tumble back below the psychological $2,000 / ounce level.
Oil continues to struggle holding onto gains following the concocted productions cuts by the OPEC+ cartel. Brent Crude (UK oil) is at the levels before the cuts announced a week ago.
Several OPEC+ members were against further productions cuts and traders are sceptical than the cartel will maintain these cuts with broader support. Weak economic data out of China continues to be a drag on prices with growth slowing and the property sector mired in debt that Goldman Sachs think will be a drag on the sector for years to come.
What don’t we know….yet?
(What traders need to look out for in the week ahead)
Last week was quiet on the data and events front. This week we have three key central bank policy meetings to contend with. Donald Trump will appear in a Miami court to face federal criminal charges connected to the handling of classified documents after he left office. A situation Trump brought on himself, and which could have been smoothed over had Trump not been focussed on making political capital out of it on Truth Social.
Monday
No major data.
Tuesday
UK Unemployment data. Claimant count change in May.
Germany ZEW Economic Sentiment. Diffusion index based on surveyed German institutional investors and analysts. EURO sensitive.
US Core CPI inflation data. Slowing from a year ago. Expect a fall in annual rate to 4.1% from 4.9% whilst monthly increase expected at +0.2%. The core rate, that excludes food and energy, is expected to rise 0.4% last month which would equate to a 5.2% annual rate. Anything much stronger and markets will react badly as the Fed’s FOMC meeting starts.
UK Governor of BoE, Andrew Bailey, testifying about central bank independence before the House of Lords Economic Affairs Committee. Any hints about future monetary policy will be jumped on. GBP & UK assets sensitive.
Wednesday
UK GDP. Monthly data from April. +0.2% expected. Can the UK keep confounding critics and forecasts.
US Core PPI. Producer Price Index. A measure of costs going into production. A foretaste of future inflation. Remaining benign.
US FOMC policy meeting. Expect no change in rates. Statement and press conference will be keenly anticipated for any clues about projections such as prospect for rate rise in July and cuts by year end. USD, US and global assets all very sensitive.
Thursday
China Industrial production and retail sales. Slowing as the PBOC contemplates more stimulus to prop up growth.
Eurozone ECB policy meeting. Expect 0.25% hike in REFI rate to 4%. The ECB has a difficult job as it was late to start its tightening cycle and now is faced with raising rates whilst growth has already faltered. Press conference to follow. EUR, Eurozone assets sensitive.
US Empire State and Philly Fed manufacturing index. Hard times but a recovery in New York state following last month’s horrendous data
Friday
Japan Band of Japan (BoJ) monthly policy meeting. No change expected as the BoJ maintain their ultra loose monetary policy in the face of global inflation. The Nikkei has enjoyed the ride, if the Japanese Yen has not. Unconventional to say the least. JPY sensitive.
What should we be trading?
(Analysis of the popular markets and what we like) In this segment, Adrian takes a look at the stock market indices DAX40 and FTSE100. They are both setting up for trades in opposite directions making them an interesting turning point. Tune in for clear analysis.
What’s the problem?
(Examining a problem many traders face and what to do about it)
In today’s problem, we look at broker regulation. With an increase in reports of scams in the online trading world, it is essential that you explore who you are, or might be, doing business with. In this segment, Adrian gives a run through of a quick safety check anyone can make to check if their broker is regulated by the Financial Conduct Authority.
