Weekly Markets: S&P 500, Gold, US Dollar, Powell, BOE, Japan Inflation, RBA Minutes

Global equity markets rose to a 14-month high, while the US dollar fell to a one-month low on hopes that US interest rates have peaked and further stimulus measures are expected from China.

The MSCI All Country World Index rose 0.6%, the S&P 500 Index rose 2.6% and the Nasdaq 100 Index rose 3.8%. Germany’s DAX 40 rose 2.5 % and the UK’s FTSE 100 rose 1.0 %. In Asia, the Hang Seng Index rose 3.3%, while Japan’s Nikkei 225 gained 4.5%. Risk-sensitive currencies, including the Australian dollar and the New Zealand dollar, rose 1.9% and 1.7% respectively during the week.

The US Federal Reserve left interest rates unchanged on Wednesday but indicated that the rate hike cycle is not over and rates may need to be raised by up to 50 basis points as inflation slows more than expected and the US economy is resilient. However, the market is doubtful about the Fed’s rate trajectory as the probability of a rate hike this year is less than 100% and rate cuts could start as early as next year. Markets will wait for Fed Chair Powell’s speech next week to find justification for the dovish pricing.

Past week market performance

Source Data: Bloomberg; chart prepared in excel.

Note: The Bloomberg Global Aggregate Total Return Index Unhedged USD was used as a proxy for global bonds; the BBG Commodity Total Return was used as a proxy for commodities; and the HFRX Global Hedge Fund Index was used as a proxy for hedge funds.

The European Central Bank also raised interest rates on Thursday to the highest level in more than two decades, leaving the door open for further rate hikes due to stubbornly high inflation. The ECB said it now expects inflation to be above its 2% target by the end of 2025.

While other central banks were raising interest rates, China cut some key rates last week, raising hopes of further stimulus in the coming months to support its fragile economic recovery. Data released earlier in the week showed China’s industrial production slowed more than expected in May, retail sales rose less than expected in May and fixed-asset investment rose less than expected in the first five months of 2023. According to media reports, Beijing is considering issuing around one trillion yuan in special government bonds to help indebted local governments and boost business confidence.

A series of Federal Reserve speeches are scheduled for next week, including one by Powell. US markets are closed on Monday for the holiday. The minutes of the RBA’s June meeting and Fed Chairman Bullard’s speech are scheduled for Tuesday. The minutes of the Tankan and BOJ meetings in Japan, the UK consumer price index for May and Canadian retail sales for April will be released on Wednesday. The BOE interest rate decision and speeches by Goolsbee, Mester and Powell from the US Federal Reserve are due on Thursday. Japanese inflation data for May, UK retail sales for May and speeches by Bullard and Bostic from the Federal Reserve are due on Friday.

Predictions:

US Dollar Weekly Outlook: Bearish bets increase after Fed’s hawkish pause

The decline of the US Dollar Index (DXY Index) below a key support suggests that the market seems to disagree with the Fed’s hawkish stance.

Euro forecast: Bullish breakout signals uptrend for EUR/USD

Market scepticism about the Fed’s plans to tighten monetary policy again and expectations that the ECB will need to do more to contain inflation in the coming months could drive EUR/USD higher in the near term.

Sterling weekly forecast: UK CPI and BOE interest rate decision drive further gains

The British pound has climbed to a fourteen-month high against the US dollar, and next week’s economic events should provide further gains for the pound.

Australian dollar outlook: A sinking US dollar is propelling the AUD boat

The Australian dollar rallied strongly last week as the US dollar faced strong headwinds and domestic data made the RBA’s July meeting a “live” session. Will AUD/USD continue to rise?

S&P 500, Nasdaq: Outlook for the week: hawkish Fed talk tries to cool bull run

Fed hawks warn of insufficient readings on core inflation and further rate hikes. However, US data for the coming week is weak and unlikely to counter the uptrend. VIX lower.

Weekly Gold Forecast: Gold (XAU/USD) Bears fail to find acceptance below the 100-day MA, what’s next?

Gold prices are likely to end a crucial week with more questions than answers as market participants seem to ignore the Fed. Is a retest of the $2000/oz level imminent?

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