Bulls need fresh catalyst

Market sentiment remained tilted toward the upside across the US and European markets yesterday. In Europe, UK growth and eurozone industrial production surprised to the upside, boosting bulls who see the European economies benefiting from lower energy prices and relatively higher currencies to deal with their inflation battle. Combined with government spending prospects, growth in Europe could improve. Yesterday’s numbers somehow supported that view – the Q1 growth in the eurozone was softer than expected, but industrial production made solid progress.

Across the pond, the news was less enchanting, for sure. US retail sales decelerated significantly, factory production declined for the first time in six months, and confidence among homebuilders worsened. The only bright spot was the dramatic easing in producer prices: the yearly figure fell from 3.4% to 2.4%, and the monthly number printed a deflationary reading of 0.5%. Some analysts started saying that the latter numbers point to a slowdown, not stagflation – meaning that the Federal Reserve (Fed) could lower rates and turn the tables. As such, the US 2-year yield was pulled below the 4% mark and brought the possibility of a July rate cut onto the table.

But wait... Walmart – the US retailer known for offering low prices to its customers – said it will be raising the prices of some products in accordance with the tariffs. Not all products will see price increases – the company will try to shield food prices from tariff-led hikes – but for others, depending on their sources, there will be inflation. A 30% tariff, for example, on products from China could lead to double-digit price increases, the company warned. So that aligns with the narrative of both slower spending and higher inflation – a mix the Fed will find hard to deal with.

If you ask me which camp I’m in, I’d say I’m closer to the stagflation camp than the Goldilocks – everything will be fine – camp. And despite the lower recession bets since the US/China de-escalation and the Middle East deals, economic worries for the US will remain.

And the news will continue to be hectic... Trump said yesterday that he had a problem with Tim Cook, that he doesn’t want Apple to move production to India. But Apple has been moving production from China to India to comply with Donald Trump’s will to get out of China. Producing iPhones in the US and selling them for $3000 is not a viable option, so the picture darkens again. Interestingly, Apple fell only 0.41% yesterday on the news, maybe on disbelief, maybe on the lack of alternative scenarios to help Apple get away with the US manufacturing ambitions.

Elsewhere, Nvidia consolidated gains on worries that some people at the White House are concerned that the huge sales to the Middle East would go against national security purposes and benefit China. Overall, the S&P500 started the session with limited appetite but found buyers throughout – hinting that appetite somehow improves despite less-than-ideal news. But gains are certainly at risk of trade news and policies. And the fact that the S&P’s low volatility ETF jumped nearly 2% could be a sign that the winds may be turning in the absence of further good news.

In FX

The US dollar index remains under pressure, and the dollar’s weakness is becoming a serious headache for foreign investors who didn’t previously feel the need to hedge against a weaker dollar – because in times of market turmoil and high volatility, the dollar typically gains on safe-haven flows. But recently, the dollar has been weakening despite rising volatility, and the latter increases hedging costs, leading to an unusual negative correlation between the dollar and volatility. What it ultimately warns is that – given how global portfolios are heavily invested in US companies – increased hedging against the US dollar could further weigh on the dollar’s valuation in the medium run.

In the short run, the dollar’s broad-based retreat helps the majors gain ground. The EURUSD rebounded past the 1.12 level after having tested the 50-DMA to the downside this week. Despite a set of stronger-than-expected inflation readings in major eurozone economies, the shiny industrial production numbers brought euro bulls back to the market. Sterling extended gains against the dollar as well, while the Japanese yen printed a very clear advance against the US dollar this week. The latter may have weighed on the Nikkei index throughout the week, but the Japanese blue-chip index is preparing to close a bearish week – in contrast to European peers – above its 100-DMA.

Chasing cheap deals in China?

In China, Alibaba’s profit missed estimates and led to a 7.5% selloff in the company’s shares yesterday. Part of the reason was gloomy consumer spending due to tariffs, and part was the company’s decision to divest from subsidiaries and the valuation of its equity holdings. But the company’s cloud revenue accelerated – as a sign of growing AI demand – and CEO Eddie Wu said their AI-related product revenue achieved triple-digit growth for the seventh consecutive quarter. They didn’t specify which product. Although investors were discouraged by the actual numbers, the developing AI story, various stimulus measures to boost Chinese consumption, and possible de-escalation of the trade war with the US remain promising factors for Alibaba in the medium run. As such, the price pullbacks could be interesting opportunities to buy dips. From a technical perspective, Alibaba managed to defy the bears into the $100 per share level at the heart of the trade storm and rebounded 40% from dip to peak. The positive trend will remain intact above the $120 per share level.