Monthly Market Outlook

In June, market sentiment changed in respect to rate and risk expectations. The debt ceiling risks came to an end. The US GDP beat expectations, and the FED signaled stronger growth and more hikes. As risks lessened, gold and yen lost appreciation.

Now that the FED members have turned even more hawkish, fast-rising stock markets might turn their heads towards fear instead of greed. The Russian coup attempt may remind of geopolitical risks, while new dots plot by the FED may remind that monetary risks are still relevant to the markets. Even so, markets are in a bullish mode, and one or two positive data points will add more fuel to the bullish fire, at least until the FED and ECB meetings draw near.

Macro View

The debt ceiling risks are over, and now the markets are in the focus of central banks once again, especially after the FED’s newest projections. The FED increased the rate projection for 2023 to 5.6% from 5.1%, meaning two more hikes could be in play in the coming meetings. The Core PCE forecast projection was revised up from 3.6% to 3.9%, and the GDP projection from 0.4% to 1%.

After the FOMC meeting, Fed Chair Powell discussed the policy at the Sintra ECB forum on central banking. Powell explained that the upward revision of the rate projection was a result of higher-than-expected inflation and growth data, along with a strong job market. He also signaled that further rate hikes are likely, stating that there is “more way to go” regarding the hikes.

Although the Fed has slowed down the hiking pace, the hiking cycle continues for now. Following Powell’s talk, the US GDP for the first quarter was revised up to 2% from 1.3%, which is significantly better than the expected 1.4%.

The substantial upward revision of the GDP and Powell’s latest comments finally had an effect on the future and swap markets, which was not immediately seen after the FOMC meeting. Currently, markets are anticipating a 25 basis points hike at the July meeting with an 83.5% probability. The probability of two hikes is at a 36% level and is gradually increasing, while rate cut expectations have been pushed back to the March meeting.

After the strong GDP revision, the expectation of a recession in the bond market increased instead of falling. The difference between the 2-year and 10-year yields fell to the lowest level since 1981. The general thought is that the latest positive surprise could give the Fed more room to be hawkish, potentially causing a recession due to overtightening. According to an analysts’ survey, the probability of a recession is still seen at 65%.

Another thing to watch is the housing sector. Despite the weakness in commercial real estate and the Fed’s fast tightening, the housing sector seems to be recovering to some extent. The FHFA house price index’s monthly change has reached the highest level in over a 10-year average, showing a clear uptrend. New home sales increased by 12.2% in May, significantly surpassing the estimate of a 1% decrease. Furthermore, the latest mortgage applications increased by 3%.

There is also an expectation of a recovery in manufacturing in both the US and EU, according to PMI data, despite recent weak performance. The pace of the recovery may fluctuate and potentially accelerate after the year-end. However, overall, inflation could prove to be stickier than initially thought by the markets. Stickier inflation would mean longer periods of high interest rates and an increased possibility of a recession.

In the Eurozone, the first-quarter GDP was revised down to negative territory at 0.1%, meaning the mildest technical recession possible, at least for now. According to Lagarde, GDP for the second quarter will be higher, but it will still remain low. On the inflation side, headline inflation fell to 5.5% from 6.1%, but the dream of a possible core CPI peak fell short as it rose to 5.4% from 5.3%, signaling that the underlying inflation is still too strong, as many ECB members have suggested. Lagarde mentioned at Sintra that there is not enough evidence of a sufficient slowdown in underlying inflation.

Regarding the July meeting, a 25 basis point rate hike is almost certain, with swap markets pricing it in with a 90% probability. The question now is what will happen after the July meeting. Some hawkish members have already stated that the ECB must hike at the September meeting and possibly the one after that. Schnabel believes that if inflation stays above the 2% goal for too long, inflation expectations could face the danger of de-anchoring. The ECB must act quickly to curb inflation without causing excessive damage to the economy. The market expects two more hikes from the ECB, including the one in the July meeting, and then the rates to be held steady for some time.

The manufacturing sector is still cooling down around the globe, according to the PMI data. Almost all major economies are below the threshold of 50 in manufacturing PMI data, indicating contraction. The EU is the weakest, largely due to the German winter recession, while the US and UK data are showing faster slowing activity.

The latest turnround in China could provide some hope, as the recovery in China has not been going very well so far, despite the news of new stimulus measures

Expectations from the Bank of England have diverged the most so far. In 2022, the UK’s economy was expected to enter a long recession for this year. Fortunately, that expectation did not come true. Currently, the GDP is in positive territory, unemployment is falling, wages are rising, and inflation is hotter than in the EU and US. BOE chair Bailey mentioned that businesses are keen on retaining their workers even if a downturn occurs. The tight job market, surging inflation, and rising wages are significantly increasing the rate hike expectations.

As of now, the market is anticipating 5 more rate hikes from the Bank of England, in addition to the 50-point rate hike surprise from the June meeting. The Bank of England’s next meeting will take place on third of August.

As for the decisions of other central banks, the Reserve Bank of Australia and the Bank of Canada surprised the markets with 25 basis points rate hikes. The RBA’s decision was probably based on the minimum wage increase, but the recent inflation data was below expectations.

Regarding Japan, there are some signs of inflation slowing down. Tokyo CPI fell to 3.1% from 3.2%. Bank of Japan Chair Ueda said that they expect inflation to fall for some time and then recover. However, for the second part, they are not too sure, so the current extra loose monetary policy will continue for now.

Central Bank Meeting Calendar

Technical View

The US 10-year government bonds faced another round of selling as the Fed signals more rate hikes. Currently, the bond rate is testing the 9-month long downtrend at 3.85%, just below the 4% resistance level. The zone between 3.85% and 4% could create significant support for bonds. However, if US economic data, especially the payrolls this week, continue to show strength, there might be a possibility of a breakout ahead of the FOMC meeting.

Brent oil prices are still ranging flat above the 70 support level. Saudi Arabia’s decision to implement an additional 1 million barrel cut has provided some support to the prices, but weak demand is currently preventing any significant breakout. The primary flat zone is between 70 and 90. However, over the last two months, this zone has narrowed to 70 and 79. These two levels can be monitored as support and resistance as long as they hold.

Precious metals continued their weak performance in June, with Palladium leading the decline, falling nearly 13%. It might find some support at 1160 after months of weak performance. Platinum also had a very weak month, experiencing a depreciation of more than 11%. Gold and silver both fell nearly 2% due to decreasing risks and rising Fed rate expectations.

The gold/silver ratio, which serves as a useful indicator for gold prices and typically exhibits a negative correlation worked very well in June too. As the gold hold better since late April against the silver, Gold entered a downtrend an it is still ongoing.

Gold and the bond market continue to be in sync with a high negative correlation. The difference between government bond yields and inflation expectations continues to pave the way for gold’s performance. As bond rates increase and inflation expectations remain anchored, gold continues its downtrend, albeit potentially milder than expected. Over the long term, gold could be seen as overvalued relative to bonds.

After the failing uptrend, gold is now falling within a downtrend channel. During this downtrend, the price held above the 1937 support for a long time, but it finally broke below it in June, and the trend continues. As long as the price stays below 1937, the downward pressure might persist, given the ongoing hiking cycle and the relatively strong performance of the US economy.

For the downward moves, around 1840 could be a good target, as the 233-day moving average and the 50% retracement level of the November-May uptrend have converged around that area. However, if gold manages to pass and hold above the 1937 level, gold bulls might try to assert dominance again. Weak economic data or any unforeseen risks could cause such a shift in sentiment.

Silver is currently caught between two different trends, trying to find a way. One is a downtrend that has been in effect since 2020, which was briefly surpassed in the April-May period but still holds sway. The other is an uptrend starting from the bottom in September.

Since May, silver has dropped more than 12% and is now attempting to find support just above the 21.40 – 22 zone, which is also near the uptrend line. As long as the support zone holds, downward moves could create buying opportunities. In the short term, 23 could act as a resistance level to watch for potential upward moves. However, a break below the trendline could deepen the latest drop even further.

The dollar index has been attempting to push up throughout June, but the strength of the euro has hindered its advances so far. The latest economic and rate forecasts from the Fed, along with the 2% GDP data, might support the dollar bulls in July as well. 104.14 and especially 105.75 could be important resistance levels to monitor. On the other hand, if the dollar index starts moving south, 102 and 100.85 could be key support levels in July.

The upcoming jobs report this week might be the primary driver for the next two weeks leading up to the CPI data and the FOMC meeting.

The stock markets enjoyed another strong month, with the MSCI World index rising by 4.99% since the beginning of June. Similar to May, Nasdaq remains the top performer, but this time S&P 500 came close to matching its performance. Even with the slowing manufacturing sector, the Dow Jones rose 4.6% due to the expectation of recovery and bullish sentiment.

The DAX index was the slowest among them, with a 2.32% return, mainly because of the mild recession in Germany.

The VIX index fell below 14.25 for the first time since the pre-COVID times and is currently at 13.59. The low VIX index is supporting the stock market, despite the recent tightening signal from the Fed. However, an excessively low VIX tends to signal a potential correction, which could happen in July.

The S&P 500 enjoyed a very solid month. Currently, it is approaching the upper line of the trend channel as the VIX falls to its lowest level in months. Lately, both positive and negative data seem to have a bullish effect on the market. The current P/E ratio has risen to 21.30, just above the 10-year average, but it is not too overvalued as of yet.

In July, the upper line of the channel will be between 4560 and 4620. This line could hold more advances as long as it remains intact. For any potential correction, 4200 could be the main support to follow, as it was one of the more resilient resistance levels before breaking.

The FX market experienced different trends before and after the FOMC meeting. AUDUSD, in particular, displayed the most noticeable difference. Following the surprise rate hike, AUDUSD performed well in the first half of the month, rising nearly 6%. However, after the FOMC meeting and colder-than-expected inflation data, it finished June with a gain of 2.28%.

EURUSD showed a clear trend in the first half of the month but turned flat after the FOMC meeting. On the other hand, USDJPY rose 2.6% despite the fall in the dollar index.

EURUSD has broken the uptrend and formed a formation that resembles a head and shoulders pattern. Despite the slightly negative technical outlook, euro bulls remain persistent, and downward moves have been relatively limited so far. If the downward pressures start to take effect, 1.0760 and 1.07 could be critical support levels to monitor. A break below them could potentially lead prices to the range of 1.048 to 1.05.

On the other hand, in a bullish scenario, 1.10 and, more importantly, 1.11 are the key resistance levels to watch for potential upward moves.

According to the COT report, net non-commercial Euro positions are currently at their highs, which could have negative implications for EURUSD. It has been observed that whenever Euro longs accumulate to excessive levels, EURUSD tends to experience significant losses. Since the 2008 crisis, there have been four instances where EURUSD made such moves, resulting in an average retreat of 19.35%. This raises the possibility of a short squeeze. However, before making a major downward move, EURUSD sometimes enjoys one last big push, and that could happen in this instance as well.

EURUSD is close to its long-term downtrend from 2008, by nearly 5%. On the other hand, many previous reversals did not reach the trend line at all. A key difference from earlier downward moves is that the low points of euro net long accumulation are getting higher and higher. This could mean there is a chance that the long-term trend could end in the coming months as well.

GBP has demonstrated resilience against the dollar compared to many other currencies, as inflation stayed hot and recession expectations diminished. The three-year-long downtrend has been surpassed, and now GBPUSD is pulling back and testing the trendline from the other direction. As long as the price holds above the 1.25 support, there is a good chance for it to continue its rally. Key resistance levels going forward are 1.2850 and 1.3190. However, if 1.25 is broken below, the positive technical outlook could change for the worse.

USDJPY has changed its trajectory to a much steeper slope, as the Bank of Japan decided to continue its current policy for some time. The yen bulls’ hopes for any change in policy have been disappointed, as the new chair, Ueda, signals that the loose policy will persist, and it will take some time before any changes are made. Ueda is hopeful for a recovery after a decline in inflation, and only then could a change of policy be considered.

As USDJPY continues to rise, another factor to watch for is the possibility of FX intervention. There could be some sharp pullbacks if potential interventions happen. However, as long as the current policy holds and the Fed continues its tighter policy, USDJPY might continue to experience upward pressure. Key resistance levels to monitor in July are 1.45 and 1.4612.