Astonishingly optimistic

Market mood is astonishingly great this week on the back of a global decline in yields, triggered by the Japanese government’s will to adjust the size of its bond issuance amid a selloff in long-maturity bonds sent 30- to 40-year JGB yields to all-time highs on growing concerns that the Japanese government won’t be able to cover its massive budget deficits. But the yields are higher again this morning, hinting that the volatility there continues.

Nevertheless, the rally in Japanese bonds helped pull the US 30-year yield below the 5% mark. And optimism from falling sovereign yields was compounded by better-than-expected US durable goods orders in April and a surprise rebound in consumer confidence in May. The Conference Board’s gauge posted the biggest monthly gain in four years and exceeded all estimates, helped in part by the temporary trade truce announced between the US and China. Inflation expectations also fell by the most since mid-2022, apparently on the back of lower gas prices.

But that confidence gauge doesn’t capture the latest 50% tariff threats on American imports of European products, the uncertain and unilaterally shifting deadlines, or warnings from companies like Walmart that price hikes from tariffs will impact a broad range of goods. It's also worth noting that on-and-off tariffs and negotiations disrupt global supply chains by creating tension at ports, which are already under pressure, especially in major European hubs dealing with labour shortages and shallow water levels on the Rhine.

So to me, the 2% rally in the S&P 500 seems exaggerated. Futures are slightly in the red today, while the US dollar, which rebounded yesterday from its lowest levels since April, looks better bid against majors. The EURUSD is testing the 1.13 mark at the time of writing, Cable has slipped below 1.35, and USDJPY is approaching the 145 mark. However, the fundamental reasons weighing on the US dollar — trade tensions and swelling debt concerns — remain intact, suggesting that the latest rebound is unlikely to mark a sustainable shift in sentiment.

Zooming into the eurozone, the flash CPI update from France confirmed easing price pressures in May — the figures were soft and below expectations. French inflation dropped to its lowest level in five years. Spanish, Italian, and German updates are due Friday and are expected to confirm further easing, after last month’s surprise uptick. In fact, the eurozone's largest economies are expected to post CPI figures below the ECB’s 2% target for the first time in eight months.

Softening inflation supports dovish European Central Bank (ECB) expectations and, in the context of rising government spending, should also back European growth prospects — and support the euro’s YTD rally. Support is seen near 1.1212 (the 23.6% Fibonacci retracement of the YTD rally), around the 50-DMA at 1.1180 (which acted as key support during the April–May retreat), and at 1.1025, the 38.2% retracement level that could mark the line between a continued rally and a medium-term bearish reversal.

Across the Channel, UK data showed food prices rising to their highest levels this year, mainly due to the government’s budget measures — a rise that’s expected and already factored into Bank of England (BoE) expectations. Still, there's a growing chorus of analysts and politicians accusing the BoE of falling behind the curve in policy easing, and warning of economic trouble ahead. But whatever the BoE expectations, the dollar’s trajectory matters more for Cable’s direction than British fundamentals at the moment.

Elsewhere, the Reserve Bank of New Zealand (RBNZ) lowered its interest rate by 25bp as expected and projected further cuts due to downside risks from the global trade war, which continues to weigh on New Zealand’s exports and broader domestic growth outlook. The Kiwi was little changed against the dollar. The AUDUSD, on the other hand, slipped below its 200-DMA on the back of a broad-based US dollar rebound. Worries over Chinese weakness will likely cap the Aussie’s upside potential.

Turning to China, equities remain under pressure. Disappointing results from PDD yesterday sent the stock down more than 13% on Nasdaq. Q1 revenue rose slightly, but profits nearly halved as the company recently lost its ‘de minimis’ privilege for small packages sent to the US — and other Western countries are now considering taxing low-value imports to counter the company’s ultra-competitive pricing, which is by far impossible to match in Western markets. CEO Li Chen said they should ‘invest decisively to support consumers and merchants, but that profitability will remain under pressure ‘for a considerable period of time.’ Zooming out, the Nasdaq Golden Dragon China Index spent a third session below both the 50- and 100-DMA. I still like Chinese tech stocks — and I like them better at cheaper prices.

In the US, it’s Nvidia earnings day! The company is expected to post $43.2bn in Q1 sales, with net income above $20bn. Its recent Middle East deals should boost revenue forecasts for next quarter and help offset the impact of US export restrictions to China. In that context, AMD was upgraded yesterday to 'hold' at HSBC, thanks to its AI deal with Saudi Arabia.

Anyway, strategists at BBVA think that strong earnings from Nvidia could fuel another leg of the US equity rally — noting that investors are still sitting on about $7 trillion in cash funds and options markets suggest that the stock price will move more than 7% on either direction depending on whether investors like what they see, or not.