Monthly Market Outlook

In May, markets enjoyed the retreat of the dollar despite a hawkish FED and ongoing geopolitical tensions. Precious metals remained strong, commodities gained value, and AI optimism continued to dominate the markets. 

In June, the main focus will once again shift to central banks. In the first half of the month, the ECB and FED will update their forecasts, which will likely shape the markets going forward. The main topic of discussion in the coming month will be the neutral rate. 

Macro View 

The markets are entering a crucial month in June. Central banks will have their final say about the economy after reviewing the past three months. Starting this year, the market heavily priced in a March rate cut by the FED. Even the most pessimistic expectations anticipated cuts beginning in June. Now, as we enter June, no cuts are in sight—at least not from the FED. This turnaround has sparked discussions about the neutral rate, commonly known as R*, among markets, analysts, and central bankers. 

The chart below shows the Bloomberg Financial Conditions Index. Values below zero indicate restrictiveness, while values above zero indicate looseness. As the rate-hiking cycle began in 2022, the index fell below zero as expected and stayed in the restrictive area for months. However, despite a 5.5% federal funds rate, it now shows looseness similar to when rates were at 0.25%. The current level of restrictiveness is not significantly hampering growth or economic activity. This suggests that the neutral rate might be much higher than before, and rates need to stay higher to bring inflation down to the target level. 

The current level of restrictiveness has not significantly hampered economic growth. Once, recession fears ruled the market, but now this probability is much lower. Although the first-quarter GDP came in below average, looking at the past few quarters, the U.S. is growing above its long-term average, and underlying strength is still present. The latest strong PMI was also a key indicator that not only is the services sector still strong, but manufacturing seems to be catching up as well. 

Despite the optimism, history might be giving Fed members a worrying signal. Before the 2001 and 2008 recessions, when the federal funds rate was at its highest and the FED was holding rates high, unemployment dipped near 4%. The same dip might be happening now. Currently, the market’s focus is more on inflation because the disinflation process seems to be slowing and the labor market’s supply-demand dynamics are coming into better balance. However, this balance might be shifting. In the coming months, starting with June, jobs data might steal the spotlight from inflation again. If unemployment rises for a couple of months in a row, talks of rate cuts will intensify very rapidly. 

Economic activity is intensifying worldwide. Eurozone economies diverged negatively in 2023, but with the start of the new year, the recovery in activity has been significant. Manufacturing activity also seems to be picking up. The PMIs for the UK, China, Japan, and the US have been above 50 for months, indicating a stable increase in activity. The recent jump in the PMI for the US will be tested this week with incoming data from the ISM manufacturing and ISM services. If a similar jump is shown, the dollar index might gain value ahead of the key jobs report. 

As for China, markets will watch how the new measures to ease the pain in the housing sector will work. 

The manufacturing sector is giving more and more recovery signals every day. Manufacturing PMIs are rising rapidly in the UK, EU, and Japan, while the US remains above 50. Commodities have ended a two-year downtrend, driven by the recovering manufacturing sector, a shortage of copper on Comex, China’s new housing sector plan, strong precious metals, and high oil prices due to geopolitical tensions and OPEC cuts. However, despite the end of the downtrend, the creation of an uptrend is not too clear. Metals have risen too fast, there is significant pressure on Israel to end the Gaza war, and the copper squeeze might be a temporary effect. Despite the OPEC cuts and geopolitical risks, oil prices are hovering instead of jumping, so there is no additional support from that quarter. The highest probability for general commodity prices is to enter a consolidation period between two key zones: 94-97 for support and 108-110 for resistance. 

In the first week of June, the ECB will decide whether to start cutting rates. So far, market expectations and central bankers’ comments are heavily one-sided, supporting a rate cut. The market is pricing the cut with more than 95% probability, making it almost guaranteed. Traders will be looking for indications of future cuts and updated forecasts this week. The latest CPI from the Eurozone surprised the market, especially with the jump in core inflation. Currently, markets only expect two cuts from the ECB in 2024. 

Central Bank Meeting Calendar 

Technical View 

The US 10-year government bond yield is still on an uptrend, but higher highs have not formed for a while now. The FOMC will be the main driver in June. If the FOMC does not turn more hawkish, 4.35% and 4.07% might become the key levels to watch in June. 

Brent ended its uptrend in May and is now consolidating below $85. OPEC members are still discussing plans to extend supply cuts until the end of 2024 or potentially into 2025. If agreed upon, this decision might limit the downside move. The Iran elections and a possible Israel truce will also be in the spotlight. 

Precious metals diverged from each other, perhaps more so than in recent years, in May. Gold remained flat after weeks of above-average surges, while silver narrowed the gap with gold with a 12% upward move. Platinum continued to gain relative value against palladium. 

Gold made another attempt to surpass $2400 and reached $2450, but for the second time, a selling reaction occurred from that area. Despite the huge surge in silver, gold could not maintain its gains in May. The momentum is clearly shifting toward a more neutral state. The market is selling at the tops rather than buying the dips, as seen in March or April. The key level to watch is the Fibonacci 38.2% level. The $2272 support has held against previous attempts by gold bears so far. If that level breaks, sentiment might turn negative rapidly. However, until a break occurs, a consolidation period might continue moving into June. 

Silver has outperformed gold as expected, but now the rally may have reached its peak. In just three months, silver surged close to 50%. A correction might be due. However, so far, the support level of $30 is holding against downward moves. This level corresponds to the 23.6% retracement level and the two previous tops in 2020 and 2021. If a break occurs, a move toward $27 might begin. 

The main trend of the dollar index has not changed since November 2022. The movement remains flat between 101 and 107. However, starting from January, a clear uptrend has been in play. After closing at 107 in April, the dollar fell to the lower line of the trend channel. The 100 and 200-day moving averages, the lower line of the trend channel, the 38.2% retracement level, and the horizontal support all converge in the 104-104.25 zone, making it crucial ahead of ECB and FED decisions. 

The stock markets extended their run in May, with AI optimism still at the helm. The MSCI World Index rose 2.93%, similar to the S&P 500. With tech leading the charge, the Nasdaq rose 3.72%, while the Dow Jones Industrial returned only 0.69%. The divergence and the continuing rise of stock markets mainly come from AI optimism. Nvidia’s monster earnings report with optimistic forecasts indicate that the flame is still burning brightly. 

The VIX is still running very low relative to long-term averages. This indicates that market optimism is still ongoing. 

But the run of indices might be a bit overstretched. Big tech is leading the markets with their high weight in indices, but the rest of the stock market is singing a different tune. The S&P 500 equal-weight index to S&P 500 ratio has fallen very rapidly since the start of 2023 and is even below the levels seen during the 2020 COVID shock. During the 2008 recession and the 2020 COVID shock, the ratio heavily favored heavyweights, much like today. However, instead of experiencing a dip, stock markets are reaching new highs. These new highs might have shaky foundations. A couple of pieces of bad news that question AI optimism can lead to rapid retreats or a rotation to small and medium-cap firms. But so far, the music continues, and so does the dance. 

The S&P 500 tested the 34-day moving average on the last day of May and made a huge comeback. However, there could still be some bearish pressure as the FOMC approaches. There are numerous key supports between 5150 and 5200, and this zone is likely to hold against any downside attempts. A break below this zone might change the trajectory of the index for the medium term. As long as the supports hold, though, new all-time highs are within reach. 

In May, the dollar index fell, and most currencies gained against the dollar. GBP was one of the strongest performers with an increase of more than 1.4%, while EURUSD remained relatively steady but rose with sudden jumps. USDJPY was perhaps one of the most volatile pairs, similar to April, and despite the retreat of the dollar, the yen continued to lose value against it. 

EURUSD continues its sideways movement between 1.048 and 1.11 since late 2022. The overall outlook has not changed, but the shorter-term outlook has shifted in favor of the EUR. The downtrend from the end of 2023 has ended, with the 50-day moving average and 50% retracement of the September–December run now acting as support. It is still unclear how the cuts from the ECB and the FOMC will change the technical outlook, but the upward momentum seems to be losing steam. 1.0775 will be the level to watch for direction in June. 

USDJPY is slowly gaining ground after the massive $62 billion worth intervention. The intervention slowed USDJPY’s rapid progress, but the pressure will still continue due to the significant rate difference between Japan and the US. However, the risk of more intervention probably keeps the USDJPY bulls in check for now, and steady moves above 160 are not highly probable. Nevertheless, any downside reactions or interventions might still create buying opportunities as long as the 150-152 support zone holds.