European stocks reverse earlier losses in data quiet session

European stocks have reversed earlier losses and US futures are pushing higher as investors shrug off last week’s concerns over a more hawkish Fed.

Bond yields are mixed across the curve with the 10-year Treasury drifting lower on speculation that Fed tightening monetary policy will bring inflationary pressures back under control. This is helping risk appetite, which is once again returning to the market.

After the Fed’s hawkish turn last week, central banks and their next moves will remain in focus this week. ECB’ Christine Lagarde is due to speak today before the European Parliament Economic and Monetary Affairs Committee. Jerome Powell will testify before Congress tomorrow and the BoE will announce its rate decision on Thursday. This hattrick of Central Banker appearances should provide the market with further clues as to the direction of monetary policy from here. There is a good chance that we will see some choppiness in the markets as the debates surrounding the next moves are priced in.

European bourses moved higher with the exception of the French CAC 40 which trades on the back foot amid growing signs of political turmoil. The first-round results of France’s elections are more than disappointing for French President Macron’s party, which performed significantly worse than expected. The abstention rate of around 70% perhaps highlighted just how uninspired and untrusting French voters are. The fact that the Euro is rising and the CAC is falling indicates that this is just a domestic risk at the moment. It is still far too early to draw conclusions about the 2022 Presidential elections on the back of these results.

A quiet economic calendar in both Europe and the US is giving trades little to really sink their teeth into, some drifting across both sessions could be expected.

FX – USD slips, GBP rallies with BoE in focus later this week

The US Dollar is slipping away from the 2-month high hit in the previous week as risk appetite rebounds. Last week the Fed revealed that it expects two interest rate hikes in 2023. The FOMC meeting was then followed by St Louis Fed President James Bullard suggesting that the Fed could look to hike rates as soon as 2022. However, the US Dollar has been unable to maintain its gains at the start of the week. Federal Reserve Williams speech later today could provide fresh impetus.

The Pound is a notable outperformer versus the greenback at the start of the week trading 0.4% higher. Some of those gains are due to the softer tone surrounding the greenback, whilst other stem from expectations of a slightly more hawkish tilt from the BoE later this week following last week’s jump in inflation. Unlike the Fed, the fact that the BoE is not aiming to overshoot its 2% inflation target, could help lift the Pound at a faster clip off recent lows.

Oil – The only way is up?

Oil prices are once again on the rise, building on 1% gains across the previous week, the fourth consecutive week of gains. Optimism surrounding a strong summer driving season combined with a pause in talks to revive the Iran nuclear deal is giving bulls the opportunity to drive prices to higher.

Both oil benchmarks have rallied hard over the past four weeks as economies reopen and rebound following pandemic restrictions. Concerns over Iranian oil flooding back into the market have eased as talks pause amid Presidential elections in Iran.  The election of a hardline judge Ebrahim Raisi, who is already under US sanctions could delay any nuclear deal being agreed.

The other potential headwind for oil is rising US oil output. The Bake Hughes rig count revealed an increase of 8 last week to 373 rigs – the highest since April 2020. Oil trades well above the $49 a barrel which most shale oil producers in the Permian Basin require to break even.  Even so, OPEC officials believe that US oil production growth will remain limited this year despite prices rising. The higher the oil prices push, the more focus we could see on the Baker Hughes rig count numbers.

Gold stages a rebound as treasury yields fall

After 6 straight sessions of declines and its worst weekly performance in 15 months, Gold is attempting a rebound. The Fed’s hawkish surprise last week sent treasury yields and the US Dollar to a 2-month high, weighing on demand for the non-yielding US Dollar denominated precious metal.

As the new week kicks off, treasury yields have taken a turn southwards falling below 1.40% which has eased the pressure on Gold enabling it to push higher. Technically, the picture is bearish as Gold trades below several key levels, including a descending trend line from August and its 200 day moving average.

The Fed’s next moves and inflation will remain key themes this week with Jerome Powell’s appearance before Congress tomorrow and PCE inflation data on Friday.