Monthly Market Outlook

In June, political risks dominated the markets with European Parliament elections, the surprise election decision from Macron, and the Biden-Trump debate in the spotlight. Geopolitical tensions in the Middle East continued, and the dollar index strengthened. 

In July, political news will still have a significant impact in the EU, UK, and US. In the second half of the month, central banks might steal the stage. A possible Israeli operation into Lebanon might create additional geopolitical risks as well. 

Macro View 

Geopolitical, political, and trade risks shaped the FX markets throughout June. Israel’s Gaza war continues despite a UN resolution regarding Biden’s cease-fire deal. Israel refuses any deal with a permanent cease-fire while Hamas refuses any deal without one. As the conflict continues in Gaza, Hezbollah has stepped up its attacks from southern Lebanon. Israeli command is preparing for an operation into Lebanon, while diplomatic efforts continue, to prevent another conflict that could spiral out of control if other Iranian-backed militias decide to enter the fray from Iraq and Syria. The risk of another Iran-Israel standoff will increase if Israel decides to begin a full operation in Lebanese territory. 

EU elections increased the political risks in the forex market. Right-wing parties gained significant wins despite the centrist majority still holding in the parliament. These gains will have long-lasting effects on the Eurozone’s political and economic landscape for years to come. The first impact came from France. Macron surprised everyone with an early election gamble to counter the advance of the far right and far left. According to the latest polls, Le Pen is projected to win the election but will need a coalition. If the RN gains an absolute majority, the euro might come under heavy pressure. Regardless of the results, unless Macron pulls off a huge surprise, Euro bulls will be cautious about entering trades in the long term. 

While geopolitical and political risks are in the spotlight for now, trade war risks are brewing again. The success of cheaper electric vehicles from China has been significant. Both the US and EU feel threatened by the rapid market share gain of Chinese EVs and have imposed heavy tariffs on China. These decisions have increased the risk of another trade war. Trump’s debate win over Biden has increased his chances of another Trump presidency. Trump has pledged actions against China, such as reinstating duties on goods and making further moves in the auto industry. Markets might start to price in new trade war risks if Trump’s chances of winning remain high. 

Economic activity might be showing the first signs of a trend change. The major economies still have PMIs over 50, indicating ongoing growth, but the speed of growth is slowing. Only the US has diverged positively, but that might be an illusion because ISM data for both services and manufacturing have slowed significantly. The PMI might follow suit in the coming months. 

In June, both the ECB and the FED updated their economic projections. FOMC members decided against any cuts and projected only one cut for the remainder of 2024. This dot plot showed that members divided between one or two cuts. The inflation projection received a modest upward revision, but perhaps the most important information in the forecast revisions was the “Longer Run Federal Funds Rate.” The change in the longer run rate indicates that members see the neutral rate increasing not just in the short term, but in the long term as well. 

The Bloomberg Financial Conditions Index supports the thesis that the neutral rate is now higher. At the beginning of the rate hiking cycle, financial conditions tightened, but now they are at a level similar to when the federal funds rate was 0.25%. This change might have several consequences, such as slower rate cuts, longer and higher bond yields, higher debt costs for the government, and more risk for inflation in the future. 

But the FED might have other problems besides inflation and higher neutral rates. Usually, after the rate hiking cycle reaches its peak, unemployment starts to rise, at first slowly like a signal, and then it got out of control, leading to a recession. Similar to the last two recessions (except the COVID-19 shock), unemployment is slowly creeping up. Whether this is the first signal, as in the last two times, is still unclear, but it certainly poses a risk to financial markets. There are some differences now compared to previous cycles. The job market is tighter despite high immigration, and financial conditions are much more relaxed, perhaps due to the higher neutral rate. Traders will have to navigate much more uncertainty in the coming months. 

The ECB cut all three interest rates by 25 basis points in the June meeting, but the decision raised some questions because inflation forecasts were revised up at the same time. The Eurozone has shown some signs of recovery, but this recovery is far from strong at the moment. Markets expect two more cuts (74% probability) from the ECB this year. 

Forex markets are also watching Japan very carefully because of possible interventions or a surprise rate hike from the BOJ. FX interventions have only had temporary effects but have bought some time for policy normalization. USDJPY has reached the previous intervention level but with lower volatility. An intervention from the BOJ would not only affect the Japanese yen but also the dollar index and precious metals. 

Central Bank Meeting Calendar 

Technical View 

The US 10-year government bond yield fell below the 4.35 support level and is now testing it again. The overall trend points to an upward movement since early 2022, with a short-term downward correction trend towards it. The MOVE index is also falling slowly. This calm volatility might continue for a while as traders assess the data and risks. However, as long as the longer-term upward trend holds, yields will continue to stay high. 

Brent fell in early June due to the surprise OPEC decision to slowly end production cuts. The move was swift, but the $78 support level held the downward pressure. The subsequent bounce was strong, and the price is now approaching the $89 resistance level. It is likely that the price might stabilize between $78 and $89 in July. 

Precious metals felt the pressure of a stronger dollar in June. Silver led the decline with nearly a 6% loss. Gold remained steady throughout the month and ended June with a small loss. Palladium made a surprise comeback despite the overall weakness in precious metals, achieving a 2.8% return last month. 

For gold, the upward momentum seems to have completely slowed down despite the heightened risks. The rising dollar index may have played a role, possibly due to some profit-taking action. China has stopped increasing its gold reserves after an 18-month-long buying spree, which has dampened gold bulls’ optimism. 

A consolidation setup appears to be forming within the yellow zone, with the 2280 support level holding back downward moves for the moment. Gold will need some kind of significant news, either negative or positive, to make another attempt to break out above the 2350 resistance and reach the upper line of the consolidation trend, or to break through the 2280-90 zone to the downside, return to its 144-day moving average, and complete the correction of the massive surge seen in recent months. 

Silver’s triangle breakout setup worked perfectly, and after reaching the target level, the anticipated correction began. Silver broke the uptrend that had supported the triangle setup (orange trendline). After breaking a four-month-long trend, silver is now retesting that trendline from below. As long as it stays below 30, the correction might resume towards the midpoint of the surge, which is near 27.25. 

The dollar index fell below the trend for a couple of days, but the 104.25 support level was able to hold, and bulls have once again gained control of the market. The upward movement is ongoing towards the 107 resistance, which has been a ceiling for the dollar since late 2022. The pushback the date of rate cuts furher, along with the ECB starting a cutting cycle, has had a significant effect, compounded by the weakness of the Japanese yen and Chinese yuan, as well as rising EU political risks. As long as the trend holds, modest dollar gains might continue in July. However, EU elections, along with the ISM and jobs reports from the US, will have the final say. 

The stock markets extended their run in June, driven again by AI optimism. However, in the final week, AI stocks began to experience some mild correction, causing traders to worry that high valuations might start to weigh on the stock markets. The MSCI World Index rose by 2.67%, lagging behind all three major US indices. This is mainly due to political uncertainty in Europe. The DAX Index ended June with a -0.75% return. The Nasdaq led the indices with a 7.31% gain, as tech stocks enjoyed strong returns, while the S&P 500 surged more than 5%. 

The VIX is still running very low relative to long-term averages, indicating that market optimism is ongoing. Since April, there have been no sudden jumps, and traders have enjoyed a steady run. 

The Equal Weight/S&P 500 Index ratio has extended its downside moves to a dangerous degree. When the ratio falls too much, it usually triggers selloffs across the stock index. There are three possible scenarios for the coming months. First, the ratio could continue to fall and trigger a sharp correction. Second, the S&P 500 might continue to surge despite the broken ratio, but when the correction begins in the near future, it will likely be more severe. The third and most likely scenario is that traders will start to rotate towards cheap valuation stocks while taking profits from overvalued stocks. In this case, the S&P 500 will fall modestly, but the overall trend will still show an upward trajectory. In July, traders might see the first signals of which scenario is becoming more likely. 

After testing the 34-day moving average, the S&P 500 has once again used this moving average as a stepping stone to higher levels. The index has now reached the 50% extension level of the last downward move and has been testing it for five days. The 5563 level has created significant resistance. If this situation continues, the S&P 500 might return to test the moving average again. In July, the key support levels to watch are 5378 and 5300, while the target for an upward move, if the 5563 resistance is broken, could be 5700. 

In June, the dollar index recovery had a notable impact on the forex market. EURUSD fell by more than 1%, while GBP remained relatively strong against the rising dollar. AUD and CHF made some gains against the dollar despite the dollar index’s movement, but USDJPY stole the show with a 2.59% return, moving past 160. 

EURUSD was poised for another test of the 1.10 level at the start of June. However, optimism faded with rising political risks. Now, EURUSD has retreated below the yellow trendline and is looking for its next direction while staying near 1.07. This week will be important for EURUSD. If weakness continues and it falls below 1.0690, the path to 1.048 might begin. However, after the French election, depending on the results, EURUSD might retest the broken yellow trendline before deciding its next move based on the US ISM, jobs data, and Eurozone inflation data. In the longer term, the sideways trend that started in the last quarter of 2022 is still continuing. 

USDJPY has once again recovered from the massive intervention and is moving to new highs not seen since 1986. However, the yield difference between Japan and the US is getting tighter while USDJPY continues to rise. This may be a result of the intervention, as USDJPY might not yet reached equilibrium. These levels might be worth considering because USDJPY is pushing against the trendline, the threat of further intervention is increasing, and support from yield differences is diminishing. If USDJPY moves towards the 100% extension level, which is around 165, this might create a selling opportunity and offer a chance to profit from the intervention trend. However, over the longer term, sell-offs could still present buying opportunities unless the BOJ and the FED change their policy trajectories.