Markets Week Ahead: Nasdaq, Gold, US Dollar; Debt Ceiling, US PCE, Germany Ifo, UK Inflation, RBNZ, Australia Retail Sales
Last week, the global equity markets experienced an increase in value while gold prices decreased. This was due to the growing optimism that a deal would be reached in Washington to raise the debt ceiling and thus avoid a disastrous default. However, this optimism was somewhat dampened by reports on Friday indicating that debt ceiling negotiations have encountered difficulties. In particular, a White House spokesperson asserted that serious disagreements persist between Democrats and Republicans.
The S&P 500 and Nasdaq 100 index experienced an increase of 1.6% and 3.5%, respectively, while the German DAX 40 advanced by 2.3% and the UK FTSE 100 remained unchanged. The Hang Seng index declined by 0.9% in Asia, while Japan’s Nikkei 225 saw a significant surge of 5.0%. According to the US Congressional Budget Office, the US is at a high risk of defaulting on payment obligations in the first two weeks of June if a debt ceiling increase is not implemented.
Past week market performance
The Bloomberg Global Aggregate Total Return Index UnhedgedUSD serves as the proxy for Global Bonds, while BBG Commodity Total Return represents Commodities and HFRX Global Hedge Fund Index is used as the proxy for Hedge Funds.
Fed Chair Powell suggested at the June meeting that a pause may be necessary due to tighter credit conditions, stating that achieving policy goals may not require as much of a rise in policy rate as previously anticipated. He further stated that decisions would be made on a meeting-by-meeting basis. The market is left to question whether this pause indicates an end to the tightening cycle or simply a temporary hold, as highlighted by Atlanta Fed President Raphael Bostic. Market projections currently indicate a 45% chance of 75 basis points in rate cuts by year-end.
Equities in China and Hong Kong exhibited weaker performance compared to their counterparts, largely attributed to the release of underwhelming data from China such as retail sales, industrial output, and fixed asset investment. This has raised concerns that the momentum of post-Covid recovery may be waning. Furthermore, the manufacturing sector unexpectedly contracted earlier in the month due to an exacerbation of producer price deflation. Nevertheless, it is possible for stimulus measures aimed at bolstering the economy to alleviate some of these potential negative effects, thereby maintaining an overall trajectory of recovery throughout the year.
In the upcoming week, discussions regarding the US debt ceiling are likely to have a significant impact on market sentiment. Additionally, various Federal Reserve officials are expected to make public statements throughout the week, commencing on Monday. Wednesday will see the Reserve Bank of New Zealand’s announcement of their interest rate decision, with an anticipated increase of 25 basis points to 5.5%. The same day, inflation data for April in the UK and Germany’s Ifo Business Climate will be released. On Thursday, there will be several important releases including FOMC minutes, Germany’s Q1 GDP and Gfk Consumer Confidence index, and US Q1 GDP data. Finally, Friday will see the release of retail sales data for April in Australia and the UK, as well as US core PCE price index and durable goods data.
Forecasts:
The outlook for the EUR/USD currency pair involves a potential fightback for the euro following remarks made by Powell that resulted in a rise above 1.08 against the dollar. The direction of this currency pair will be influenced by upcoming economic data from the US, which will have a significant impact on its trajectory.
The upcoming week for the British Pound (GBP/USD) will be characterized by the influence of market sentiment and price action, which will be determined by two major factors: ongoing discussions surrounding the US debt ceiling and the latest inflation reports from both the US and UK.
Despite macroeconomic risks, the Australian Dollar experienced a temporary decline last week but ultimately regained its position within a 3-month trading range.
In the context of the academic discourse, it is observed that the Japanese Yen has continued to experience a decline against its major counterparts, owing to external factors such as a rise in Treasury yields. The focus is now on whether USD/JPY will maintain its upward momentum, with attention placed on crucial US data. Additionally, there has been an occurrence of a triangle breakout in USD/JPY.
The weekly forecast for gold suggests a potential bullish continuation resulting from a flight to safety. This is due to recent events such as the stalled debt ceiling talks, warnings from Yellen regarding possible bank mergers, and Powell’s remarks on slowing credit leading to a reduction in potential rate hikes. As a result, the outlook for gold has become more positive.
The US Dollar experienced a continued upward trend in conjunction with Treasury yields, as the market began to exclude the possibility of Federal Reserve rate reductions. In the near future, it remains to be seen whether the preferred inflation gauge of the Federal Reserve will provide further support for the crucial breakout of DXY.
The current prospects for crude oil appear unfavorable due to the potential for a recession and the stalemate regarding the U.S. debt ceiling. Additionally, a double top pattern is strengthening indications of a bearish trend, which may result in decreased prices for crude oil in the short term.
