Last week ended
with a big surprise after the Personal Consumer Expenditure Index (PCE) dropped
sharply to 3.8% in June against 4.6% in May. This pushed the S&P 500 broad
market index up by 1.2% to 4453, and provoked the largest intraday spike since
April 2022 of 1.5%.
Surprisingly,
a sharp drop in inflation has not changed investors’ perception of the monetary
policy of the Federal Reserve (Fed). The probability of increases in interest
rates should go lower considering this drop, but investors still expect another
interest rate hike by the Fed this month and a decrease of the rates in May
2024. The debt market is even more puzzling as the interest rate curve
inversion is increasing. The yields for 2-year Treasuries rose to 4.95% from
4.90% over the weekend.
So, a
divergence of the stock and debt market is increasing despite lower PCE. This
is a fundamental difference as large institutions are expecting troubles in the
economy and in the financial market, according to rising inversion. The stock
market, which is largely populated by retail investors, is surging as they are
betting on a booming economy and stocks amid lower inflation. Following the
institution is usually the safest way to go. But the market could be overheated
much longer than investors have money to support the rally. So, it is better to
keep short positions for the U.S. stock market open.
This week
two major events are expected. The first is the publication of the Federal Open
Market Committee (FOMC) Minutes from its June meeting, when the Fed’s Chairman,
Jerome Powell, insisted on two more interest rate hikes in 2023. The second is
the publication of the U.S. Labour Market Report for June that could keep the
Fed singing with the same hawkish tunes. These events will be accompanied by
the reversal opportunities for the S&P
500 index that are emerging this week, and also by mixed signals from the
currency market that could indicate to a possible short for EURUSD and a
possible long for AUDUSD. This combination could bring about a well-balanced
position during this July.
Technically,
the S&P 500 index continues to have an upside formation with targets at
4250-4350 points, that have already been met. The market has tried to return to
the support at 4340-4360 points, and was resting in this area on Monday. So, good
reversal conditions have been formed but without particular downside at the
moment.
Brent crude
prices have failed to test the support at $67-69 per barrel and bounced back
towards the resistance at $76-78 per barrel. Once the support is broken, recession
scenario chances will become very high. Its targets are at $40-60 per barrel of
Brent crude.
Gold prices
are moving inside the mid-term upside formation with targets at $2000-2100 per
troy ounce that have already been met. But the situation has changed
dramatically as the important support level of $1980-2000 per ounce was
smashed. Short positions were opened after prices tested the $1970-1980 former
support level with targets at $1890-1910 per ounce. The first half of this
trade was closed at $1910 per ounce, while the second half was left open with
the stop-loss order moving to $1980 to avoid any losses, and amid expectations
of some extra profit. When prices pass the $1900 per ounce level, this downside
scenario will be activated.
The currency
market became very volatile after PCE numbers publication in the U.S. The
Greenback has strong chances to continue strengthening but it is too risky to
go long on the Greenback at the moment. It would be better to wait for a
decline of the EURUSD below 1.06000 to seek out sell opportunities for the
Greenback.
Two major
positions have been opened for July. The first is a short position for the
EURUSD at 1.08900-1.09200 with the take profit and stop loss orders both set at
5000 points from the opening price. The second is a long trade for the AUDUSD,
which has been opened from 0.66400-066600 with the same size of the stop loss
and take profit orders as for the EURUSD.