Monthly Market Outlook

In April, markets took hits from multiple sides, with possibility of a Iran-Israel conflict, Gaza troubles continuing, unconfirmed FX intervention in Japan, and persistent inflation in the US. 

Looking ahead to May, geopolitical concerns and the timing of rate cuts will remain major issues. As June meetings approach for ECB and FED, bond yields and the dollar index will be in the spotlight. 

Macro View 

Geopolitical tensions were the primary concern for traders in April. Following Israel’s bombing of the Iranian embassy in Syria, Iran retaliated with tens of drones and missiles, warning that further retaliation from Israel would escalate the situation. For nearly a week, traders were on edge, but fortunately, tensions cooled down. However, the Israel-Gaza conflict persisted, with the Rafah operation on the verge of starting while Hamas-Israel hostage negotiations are in full swing. In the absence of a ceasefire or hostage deal, the risk remained unresolved. 

Meanwhile, tensions in the Middle East remained high, there is activity on the Ukraine-Russia front as well. Ukraine targeted several oil sites in Russia with drones, and Russia struck one of Ukraine’s largest power plants. While Russia’s slow advance continues, French President Macron’s suggestion of potentially sending troops to Ukraine caused additional concern in the markets. EU and US leaders hoped that the new aid package from the US Congress would assist Ukraine in halting Russia’s advance. 

The heightened geopolitical risks, including attacks on oil and energy sites, led to a rise in energy prices. Additionally, recovering manufacturing PMI data around the globe, the US ban on Russian uranium, and expectations of increasing energy demand due to AI adoption put pressure on energy and commodity prices. The Bloomberg commodity index broke the downtrend line in April after testing the 94-97 support zone multiple times, signaling a potential shift that could lead to additional inflationary pressure in the coming months. 

In the US, disinflation showed signs of stopping. Yearly-based core PCE changed trajectory, while super core PCE started to create another uptrend. The effect of commodity and energy price increases has been minimal so far, and most of the inflation comes from services. If commodities put more pressure on inflation, coupled with the end of the positive base effect, inflation might settle near the 2.5% – 3.5% range for the time being. 

But the situation in the labor market and services seems to be shifting as well. The latest ISM services index came in below 50, only the second time since the 2020 COVID shock. This slowdown signals a possible end to the extra strong services sector growth seen over the last 2 years. If this trend continues, the halt to disinflation might be more than just a temporary obstacle, as the Fed anticipates. 

The jobs market is also giving similar signals. The recent rise in the participation rate and a new wave of immigrants seem to be filling some of the gaps in open jobs. While open positions have been on a downtrend since June 2022, monthly net payrolls changes are still strong but showing small signs of slowing down. If this trend persists, with a possible slowdown in hiring in the services sector, rate cuts could begin before the end of the year, as both the markets and the Fed expected. 

With the latest data from the services sector, jobs report, and first-quarter GDP all indicating the possibility of a slowdown, and the Fed remaining much more dovish than expected, both the ECB’s and Fed’s rate cut expectations increased again as of the end of April. The divergence between them has also narrowed once more. Overall, the highest probability pricing in the swaps market is for 2 rate cuts by the Fed and 3 rate cuts by the ECB. Even though the ECB’s rates are already lower and expected to be cut further, EURUSD has held steady so far. 

The key data to understand the Euro’s strength against the Dollar, despite the expectations, was the magnificent run of PMI. The composite PMI of the Eurozone diverged significantly in a negative way in the second quarter of 2023 but recovered remarkably fast. It is now over the US composite by 0.1 points with favorable momentum. The concerning news, however, is regarding manufacturing in Germany. The recovery of manufacturing PMIs for Germany has been much slower than other countries, with data still indicating a rapid decrease in activity. This will be data to watch for Euro traders in the coming months. 

One of the key moments in the last few weeks for traders was, of course, the FOMC meeting. And the key decision in the latest FOMC was the slowdown of QT. Parked money in reverse repo fell too fast, while the 10-year government yield is still flirting with 5%, above 4.50%. Another bank failure occurred in April, and some banks relied on the Fed’s backstop a little too much. This overall situation might have worried the members who are still trying to decrease the massive balance sheet. The reasoning was to resume QT longer rather than faster reduction of the balance sheet and less concerned about liquidity. The decision was expected but came sooner and was larger than expected. The Fed cut the QT for bonds by more than half. This will have a positive impact on bonds and lessen the pressure, but will it be enough? That’s what the traders will look out for. 

As USDJPY touched 160, Japan finally backed the FX intervention threats with a “no comment” intervention. These no-comment possible interventions came in waves, causing USDJPY to fall below 153. We suspect that the unconfirmed intervention involved selling USD because during these times, USD retreated significantly against the EUR. Traders will watch in the coming weeks to see if Japan’s currency chief will be satisfied with USDJPY remaining below 160 or if the intervention will continue. 

Central Bank Meeting Calendar 

Technical View 

The US 10-year government bond yield changed trajectory and was on its way to 5%. However, with no surprises from the US Treasury quarterly outlook and the FOMC’s larger than expected QT cut, the yield returned to the year-to-date uptrend. Bonds are still under pressure, but this pressure might be lesser than before. The 4.25-4.35 range is the support zone to follow in May for the yield’s direction. 

Brent was in an uptrend from December and surged to the upper line of that trend channel amidst the possibility of an Iran-Israel conflict. However, with the threat level decreasing and the possibility of a ceasefire deal high, the trend broke. The downward moves might extend towards 78 if the deal is reached, but OPEC will likely continue its extended cuts in the coming months, which might limit the downside pressure in May. 

Precious metals enjoyed yet another good month, with silver leading the way  Silver surged more than 6%, while gold rose more than 3%. Silver’s return reach over 15% in the first half of April and all metals surged but the second half was completely different. Starting with the second half of April, metals might have entered a cooldown period after months of big surge. 

ETFs continue to reduce their gold positions at a high pace. According to gold demand trends Q1 report of World Gold Council, central bank, OTC and gold bar demand are fueling the gold’s surge in the recent months. Central bank demand is over the long term average for several quarters now. 

Gold surged to above $2400 in April but then experienced the long-awaited correction. The main resistance of post-COVID era was in the $2050-$2075 zone. After the breakout, the upward move came out too strong. Rising US debt and ever-increasing geopolitical risks fueled this, along with expectations of rate cuts from the Fed. Now, geopolitical concerns in the Middle East are decreasing with the Iran-Israel conflict chance almost over, and the US is pressuring both Hamas and Israel to reach a ceasefire. Rate cut expectations have been trimmed to more realistic levels as well. This might give gold bears some breathing room. 

The short-term (white) uptrend has been broken, and now gold has pulled back to the previous trend channel’s upper line and is testing it for the last couple of days. The RMI (Relative Momentum Index) gave a sell signal above 90, a rare and clear signal. The $2275-$2282 zone is the main support to follow. A break might lead to prices towards $2200 and even lower, depending on incoming data and news. 

Silver broke the four-year-long triangle and surged towards $30 in a very fast manner. Then the correction was fast as well. Now, $26 is being tested back. If it holds, a consolidation period can be expected, but a break below would mean a pullback toward the broken triangle. We expect silver to outperform gold in the coming months due to rising industry demand. 

The main map of the dollar index has not changed since November 2022. The movement remains flat between 101 and 107. The dollar has been rising within this zone, and the shorter term trend is clearly up. After testing the upper line just below 107, the dollar index pulled back due to Japan interventions and weaker data. 104.25 is now a support, and just below it, the 100 and 200-day moving averages create a zone between 103.80 and 104.25. This zone will be the main support zone in May, and traders may watch it for a break or hold. 

The stock markets experienced a correction in April amid a strong dollar and trimmed rate cut expectations. The MSCI World Index fell by 2.22% as of the end of the first week of May. The US indices S&P 500, Dow, and Nasdaq, along with the German DAX, all performed worse than the MSCI World Index. After falling until late April, with some good earnings from tech giants like Microsoft and Alphabet, the downward momentum started to ease. 

The VIX experienced a strong jump, but it ended as quickly as it started. Now, it is back below 15 once again, showing that the uptrend is intact. 

The S&P 500 was in an uptrend channel that started in October 2022. Exactly one year later, the index fell below the lower line as a trap, then surged almost 30% in 5 months, pushing past the upper line and creating an even higher-sloped, tight trend channel. However, this aggressive channel broke in April due to over-optimistic rate cut hopes being trimmed. Now, the S&P 500 has returned to the original trend channel and is testing the 34-day moving average. This moving average was a major support throughout the aggressive surge and may now act as a possible resistance. If it holds, the index might retreat towards 5047 or 4870 in the coming weeks. 

In the first half of April, the dollar index remained strong, with almost all major currencies falling against it. However, lower-than-expected GDP and payroll data, along with a dovish FOMC, changed the outlook. One of the biggest losers against the dollar was the yen, despite huge interventions, finishing the April-May 3 period with a 1.0745% loss against the dollar. 

EURUSD has formed a downtrend channel. Although the momentum appears to be shifting upwards, as long as the downtrend holds, EURUSD has the potential to fall to 1.048. The recent recovery of PMIs has aided in the momentum, but fundamentals still favor the dollar. However, if the trend breaks, another move towards 1.0910 or 1.10 might begin. 

USDJPY did as expected and broke through the significant 150-152 resistance zone. This can be seen as a cup and handle pattern or a huge ascending triangle. In both cases, it was a significant buying signal from a technical perspective. Japan also acted as expected and intervened in the FX market, resulting in very sharp selloffs. Both technically and fundamentally, the upward pressure will likely continue, and the markets will test Japan’s currency chief in the coming weeks. As long as the 150-152 zone holds, downward moves might create buying opportunities.