European and US stocks declined yesterday and the futures hint at a bearish start in Europe.
Inflation and recession fears take the upper hand, after the European Central Bank (ECB) raised its inflation significantly from 5.1% to 6.8% for this year, and cut the growth forecast, significantly as well, for this year and the next.
The ECB confirmed it will end the bond purchases as of July 1st, and intends to raise the interest rates by 25 bps in July. Christine Lagarde also said that the bank will consider another rate hike in September, and the size of the September hike will depend on inflation.
Yesterday’s ECB decision first sent the EURUSD toward the May highs of around 1.0775. But the single currency gave back gains, and the EURUSD returned below the 1.07 mark before the end of Lagarde’s press conference.
This morning, the EURUSD trades around 1.0630, meaning that yesterday’s ECB meeting sparked nothing but a quick optimism. Slashing the expectation of a 50bp hike in July gave cold feet to euro bulls. As a result, the EURUSD strength will likely remain limited for now.
In the medium run, the ECB will likely take further hawkish measures to pave the way for a stronger euro, toward 1.10 against the US dollar.
On the index level, the ECB decision triggered a fresh selloff in European equities, as the ugly growth projections came as a slap to investors. The DAX which was consolidating gains above the 100-DMA slipped below this level. The soft euro could limit the selloff, but whether it could reverse the negative trend is hard to tell. With a slowing world economy, the DAX could get back to its bearish trend building since the beginning of this year, which would imply a fall below the 14000 mark deep into this summer.
Inflation may not look good
The US stocks have been battered yesterday, with the S&P500 losing up to 2.40%, as the US 10-year yield consolidated above the 3.05 mark. The US dollar index rose above the 103 level, again.
Investors are holding their breath into today’s CPI reading. Analysts expect the US inflation to stabilize around last month’s 8.3% level, but we could see a bad surprise today, as the positive pressure on food and energy prices and the unexpected uptick in secondhand car prices in May could prevent the index to ease for a second consecutive month.
A stronger-than-expected inflation figure would revive the Federal Reserve (Fed) hawks, and eventually push the S&P500 below the 4000 mark before the weekly closing bell. A softer inflation read on the other hand, would resuscitate hope that inflation has peaked two months ago, and the worst is behind.
Don’t get your expectations too high, though
For inflation to ease persistently, we need to see energy prices soften. US crude topped above the $123pb this week. The recession fear certainly limited the upside potential. But the United Arab Emirates’ energy minister said that ‘if we continue consuming with the pace of consumption we have, we are nowhere near the peak, because Chine is not back just yet’, and that ‘China will come with more consumption’. Hopefully, they will tap into the Russian oil…
But the US LNG chaos, triggered by a fire at a Texas facility will halt 20% of US oil exports, and could push LNG prices higher in the short run.