Markets struggle to find direction. On the one hand, stocks at attractive prices encourage investors to buy. On the other hand, the signs that inflation remains firm and strong, could force central banks to adopt a more restrictive monetary policy, and add caution and volatility to operations. This arm wrestling will be present in today’s operations, which have a data-rich agenda to measure the pulse of the economy in various parts of the globe.
In the United States, contracts linked to Nasdaq have gone from less to more, with very fragile oscillations. In Europe, the Stoxx 600 index returned early morning gains, with investors still reeling from the Eurozone’s record inflation – and its implications for the bloc’s monetary policy.
European bonds rallied, for the most part, but the US Treasury bonds called for higher premiums, embedding a lower par value.
The Federal Reserve kicks off its balance sheet reduction on Wednesday. The world’s largest central bank currently holds $8.9 trillion in bonds – more than double what it was in 2020 when the pandemic broke out. With the job market close to full employment, the Fed reckons that stimulus is no longer needed. It will be an important test for the dynamics of the markets: by redeeming the bonds that will mature, instead of renewing the debt, the Fed drains the liquidity of the markets. And all this in a more restrictive monetary environment, with rising interest rates.
Six monthly gains and a lot of uncertainty ahead set the tone. On the one hand, the concern that rising interest rates will lead economies into a recession, which would affect the consumption of the commodity, gives reason for a drop in oil. But the relaxation of lockdowns in China and new European Union sanctions on Russian oil lead to greater demand for the raw material.
OPEC+ meets virtually today and the group’s leaders prepare to discuss their July supply policy on Thursday.
The Eurozone purchasing managers index showed the fragility of the bloc’s industrial sector, in times of record inflation. Manufacturing orders fell for the first time since June 2020, according to data released this morning by S&P Global. S&P Global’s manufacturing PMI dropped from 55.5 in April to 54.6 in May – the worst mark in 18 months.
With the latest inflation data – record indicators in Europe – and the proximity of the European Central Bank (June 9) and Fed (June 14-15) monetary policy meetings, markets should proceed with a cautious step. It will be a crucial moment: will the markets return to bear market? Theoretically, the bear market, in the case of the S&P 500, would reach 3,835 points – a level 7% below the current level (4,132) and where it would mark a 20% drop from its 2022 high, 4,800 points, recorded in January 3rd.
Investors remain on the lookout for any sign that inflationary pressures extend further than expected. US consumer confidence fell in May to its lowest level since February. The Conference Board index slipped to 106.4 from an upwardly revised reading of 108.6 in April. And inflation in the Eurozone in May set a record, with consumer prices rising 8.1% year on year. In the closed month of May, the S&P 500 and the Dow Jones Industrials rose 0.01% and 0.04%, respectively. The Nasdaq Composite, brought down by tech stocks, lost 2.05%.