FOMC in focus, with Oil price declines helping to ease inflation fears

European markets have kicked off on a downbeat tone, with early gains fading for the likes of the DAX, eurostoxx, and CAC. Coming in the wake of yesterday’s end to the SPX nine-day winning streak, there are concerns that the FTSE 100 will follow suit to halt the longest stretch of daily gains on record. The recent better-than-expected economic data out of the US has helped allay some recession fears for the time being, with a payrolls beat and ISM services strength holding off the selling pressure for now. However, while this provides some room for Trump to strike trade deals and allay fears of an economic downturn, the Japanese warning that they may cut back on US treasury purchases in the face of a breakdown in trade relations does highlight the risk of a surge in borrowing costs and US debt.

Precious metals are on the rise once again today, with gold and silver reversing much of the downside seen over the course of last week. Gold’s 8% decline from the 22 April peak of $3500 coincided with the rebound seen in equity markets, as optimism over the potential for improved US-China trade relations cooled haven demand. However, the pop we have seen in equities over the past fortnight does heighten the possibility that we soon see the bears return in the absence of any notable breakthrough in trade talks. With the dollar hitting a three-year low, and the 10-year yield largely rangebound, it is gold which has taken the mantle as the haven of choice during this period of global uncertainty.

Looking ahead, traders remain in wait and see mode ahead of tomorrow’s FOMC announcement, with the surprisingly resilient data seen of late bringing little hope for a rate cut from the Fed. While Powell may be under pressure from the President, the FOMC will want to wait and see exactly what the inflation and growth implications are from Trump’s tariffs before making a move. Perhaps Trump’s saving grace could come in the form of falling energy costs, with WTI dropping to the April 2021 levels of $55 yesterday. In the absence of OPEC support, oil prices may need to fall further to ultimately balance the market. Commentary from US oil producer Diamondback Energy highlights how we are likely to see the deteriorating economics lead to restricted investment and a loss of US market share.