North American News
Dollar sluggish amid more positive risk mood
- Dollar softness continues to play out, equities up again to start the new week
It’s a quiet trading day but we’re carrying over the themes from last week with the dollar keeping lower for the most part while equities are looking to extend the bounce from last week.
I categorized last week’s move as that of markets looking for some breathing room after the moves from April to early May. That largely applies to major currencies and stocks. But it is the bond market that holds the key.
As things stand, we’ve gotten to the point where the bond market is looking past Fed rate hikes and that was evident as pointed out last week. In a sense, we have priced in ‘peak hawkishness’ by the Fed – at least per the current communique. But as recession risks start to creep into the picture, that’s perhaps a cause for repricing or at least a reason to reassess.
For now at least, we’re arguably just settling into a bit of a breather after the surging moves since the start of April. The dollar is weaker again today as we continue last week’s form (it is a US holiday today, so there might be little conviction to switch things around).
The US is on holiday but we’re expecting to hear from a Fed official
Fed’s Waller: Says he support tightening by 50 bps for ‘several’ meetings
- Comments from Waller in Frankfurt
- Policy should be above neutral by year end
- I’m not taking 50 bps off the table until inflation comes closer to Fed’s 2% target
- Reduction in balance sheet equivalent to a couple of 25 bps hikes
- I’m optimistic the strong labor market can withstand higher rates
- Don’t know how soon supply chain issues will abate
- Inflation is ‘alarmingly high’
- Longer-run inflation expectations have moved up to a level consistent with underlying inflation a little above 2%
- I don’t expect Q1 drop in GDP to be repeated
Commodities
Gold Price Forecast: XAU/USD steady above the 20-DMA above $1850
- Gold begins the week on a positive tone, up by some 0.20%.
- Holiday in the US to keep prices within a tighter range amid a busy US economic calendar week.
- Fed’s Waller support 50 bps hikes for “several meetings.”
- Gold Price Forecast (XAU/USD): Steady above the 50-DMA, but it needs a break above $1871 to aim towards $1889.91.
Gold spot (XAU/USD) advances during the New York session amid thin liquidity conditions, courtesy of the observation of the Memorial Day in the US, meaning stocks and bonds would not trade until Tuesday. At $1856.05, XAU/USD reflects decent demand for the non-yielding metal at the time of writing.
Sentiment has improved since Monday’s Asian open. China reported the fewest coronavirus cases in almost three months. Shanghai and Beijing are preparing to ease some strict measures, moving to stimulate the economy, which has been hit severely by the Covid-19 zero-tolerance restrictions. Meanwhile, inflation worries are back, as Germany reported high inflationary readings at all-time-highs, at 8.7% YoY, sparking renewed fears of elevated prices and an aggressive approach of the ECB.
In the meantime, the US Dollar Index, a gauge of the greenback’s value vs. a basket of peers, is losing traction and aims towards April’s 21 low at 99.818, down 0.24% in the day. Meanwhile, the US 10-year T-note rate remains parked at Friday’s close of 2.743%.
Of late, Fed’s Governor Christopher Waller crossed wires. He said he supports 50 bps for “several meetings,” and he’s not taking 50 bps off the table until inflation closes to the 2% target. Furthermore, inflation is “stubbornly high,” and the Fed would need to be prepared to do more, Waller said. It’s worth noting that regarding the balance sheet reduction, he noted that it’s equivalent to a couple of 25 bps rate hikes.
An absent US economic docket would keep Gold traders leaning on market sentiment and the economic data revealed in the week ahead. The US economic calendar would feature the US ISM Manufacturing and Non-Manufacturing PMIs, US employment data, led by the Nonfarm Payrolls, and the ADP and JOLTs openings report.
Silver Price Forecast: XAG/USD retraces from daily highs towards $21.90s despite a soft buck
- Silver begins the week on the wrong foot, down 0.57%.
- Sentiment-wise, the market is positive, as reflected by global equities up.
- Silver Price Forecast (XAG/USD): Fluctuating around $21.50-22.50.
Silver (XAG/USD) grinds lower during Monday’s North American session, albeit the US Dollar trading softer in a shorter than usual trading session, as US markets remain closed in the observance the Memorial Day. At the time of writing, the XAG/USD is trading at $21.97, off the $22.00 mark.
A risk-on market mood keeps flowing towards stocks, thus weighing on safe-haven assets like silver. Asian and European equities finished with gains, while US futures rose. The greenback is softer during the day, as illustrated by the US Dollar Index, down 0.31%, sitting at 101.323.
Fed speaking crossed the wires. In Frankfurt, Federal Reserve Governor Christopher Waller said that he advocates 50 bps rate hikes on the table “until we see substantial reductions in inflation. Until we get that, I don’t see the point of stopping.” He added that he supports 50 bps at “several” meetings.
Silver traders need to be aware that on Tuesday, US President Joe Biden and Federal Reserve Chair Jerome Powell will meet for discussions in the White House on the state of the American and global economy.
Monday’s absent US economic calendar would keep traders leaning towards market sentiment. In the week ahead, the US docket would feature May’s ISM Manufacturing and Non-Manufacturing PMIs, the CB Consumer Confidence, and US employment data, led by the Nonfarm Payrolls, ADP report, and Initial Jobless Claims.
Silver Price Forecast (XAG/USD): Technical outlook
On Friday, Silver (XAG/USD) reached a two-week high at around $22.46, and since then, XAG/USD bulls have failed to keep prices above $22.00. That said, the white metal remains to trade in the $21.50-22.50 range, unable to register a successful upward/downward break beyond the boundaries.
Upwards, the XAGU/USD’s first resistance would be $22.00. A breach of the latter would send XAG/USD towards May 27 high at $22.46. Once cleared, the following supply zone would be February 11 low-turned-resistance at $22.86, followed by February 15 low at $23.08.
On the flip side, the xAG/USD first support would be May 26 low at $21.72. Break below would expose May 13 swing low at $21.28, followed b the YTD low at $20.45.
Oil hits a two-month high ahead of OPEC+ meeting as China signals re-opening
- China reopening and EU ban underpin crude
I can’t emphasize enough how impressive the six-week rally in oil has been.
Sure, WTI has only ralled to $116 from $102 in that time but the backdrop has been so negative. The US is releasing 1 million barrels per day from the SPR, China is locked down and global growth worries are pervasive.
To rally despite those headwinds is almost unprecedented. It speaks to genuine supply shortages, with 3 million barrels per day potentially missing from Russia.
Technically, WTI crude is now just shy of the late-March high of $116.61. A break of that clears the way for a return to $130. With China on track to re-open, the demand side is now set to strengthen.
EU News
European equities start the week off with some decent gains
- Closing changes for the main bourses
- Stoxx 600 +0.6%
- German DAX +0.8%
- UK FTSE 100 +0.2%
- French CAC +0.8%
- Italy MIB +0.6%
- Spain IBEX +0.3%
The bigger development in the eurozone today is the jump in bond yields after high German inflation. Italian 10s today are up 11 basis points to 2.989
ECB resigned to falling euro – report
- ECB report, citing insiders
Any efforts to support the euro via policy or even verbal interventions are unlikely, according to a report citing three ECB sources.
The falling currency is making it tough for the ECB to get inflation under control and today’s +7.9% German CPI report highlights just how far off base they are. But three ‘ECB insiders’ cited by Econostream Media say the currency won’t be a lever, even if the euro falls below parity.
German May prelim CPI +7.9% y./y vs +7.6% expected
- German inflation data for May 2022
- Prior was +7.4% y/y
- HICP +8.7% y/y vs +8.0% expected
- Prior HICP 7.8% y/y
- CPI m/m +0.9% vs +0.5% exp
- HICP m/m +1.1% vs +0.5% exp
These numbers are problematic for the ECB. The euro is under some pressure but it’s a holiday in the US.
This is the highest reading since German reunification.
Other News
China vice premier: I promise to stabilize the economy and supply chain
- Comments from Liu He
The optimism in markets today is in large part due to China announcing that it will end lockdowns in Shanghai in June, at least in low risk areas. There’s some skepticism they will fully follow through but that announcement came along with stimulus measures for the city of 25 million.
These comments from Liu underscore that China will be pulling on economic growth levers at some point and that’s going to be a tailwind for global growth. The timing though is highly uncertain.
Hungary PM Orban: Things are not looking good with respect to oil embargo
Hungarian Prime Minister Viktor Orban on Monday said that things are not looking good with respect to the EU’s proposed ban on Russian oil imports, reported Reuters.
Cryptocurrency News
Bitcoin finally joins the risk revival
- Bitcoin up 6.8%
The inability of bitcoin to join in on the risk rally last week was troubling but today it finally got the memo. Bitcoin is up $1940 today to $30,679, with most of the gains coming early in Europe.
The US is on a holiday today so that merits some caution but global equities continue to rally and that bodes well for crypto. The big gain today brings BTC to within $700 of the top of the range since mid-May. It’s been an unusually-quiet period for bitcoin in terms of volatility. If it can break the May 15 high of $31,500, we could see a powerful retracement higher, with $40,000 not out of the question. The key is to hurry up and get on with it because the equity rally is already starting to look short-term stretched.