That mysterious instrument

The week started on a calm note, with small gains in European indices and US futures. 

The selloff in cryptocurrencies slowed as Bitcoin could throw itself above the psychological $20K level, and is catching its breath right now. The risk of a further selloff cannot be ruled out as the tighter Federal Reserve (Fed) expectations, the global selloff in risk assets and the fact that the massive outflows in cryptocurrencies started showing some cracks in the freshly born crypto industry make the cryptocurrencies increasingly less appetizing. Therefore, we could see a limited recovery in cryptocurrencies in the near future. what we must see is the cryptocurrency companies survive to the chaotic market conditions. 

Gold and oil 

Crude oil consolidated above the $110 per barrel as the bullish trades were held back by increased risk of global recession. 

Gold remained offered as the improved risk appetite, and the prospects of higher US yields weighed on appetite.  

The mysterious tool 

The currency markets were calm as well, with the US dollar giving back some field against most majors. The EURUSD consolidated above the 1.05 level. The European Central Bank (ECB) Chief Christine Lagarde warned that there is a ‘severe’ risk of disorderly financial correction in Europe, especially in financial and housing markets as a result of a tighter ECB policy that is about to hit the fan.  

The spread between the Italian and German 10-year yields narrowed since the ECB announced that they will invent another financial instrument to deal with the diverging pace of rising yields between the core and the periphery. At her speech yesterday, Lagarde defended once again this new instrument, yet the euro bulls will likely remain in retreat until we have more details on this mysterious new anti-fragmentation tool. The 50-DMA, which stands near 1.0620 will likely act as resistance in the short run. 

In France, Macron lost majority in the National Assembly in the latest legislative elections of the weekend. It’s something rare in France, and it will force the French to find compromise to make new laws, which is a situation they are not used to, and they don’t like. The problem is, there is now such a huge opinion divergence in the Parliament that no one sees how this will play out in the next five years of Macron’s rule. The far left and far right gained a lot of seats, with Le Pen’s party increasing its seats by 10 folds compared to 2017. So it won’t be easy, and even less given the chaotic situation on the continent with the pandemic and the war.  

Elsewhere, Cable was bid above 1.22 as Brits are holding their breath before tomorrow’s inflation data, and the Aussie-dollar approached the 70 cents mark, as the minutes from the latest Reserve Bank of Australia (RBA) meeting reiterated that the Australian policymakers are ready to whatever is necessary to tame inflation, and that more rate hikes would follow the latest rate hike from the RBA. 

Calm before the testimony 

We have certainly a couple of more hours of calm in the markets. But the things will start getting serious with Jerome Powell’s semi-annual testimony due Wednesday and Thursday, where he will reiterate how strong the Fed is committed to fight the soaring inflation in the US. Recovery in US equities should remain limited into Powell’s testimony. But, from a pricing perspective, we may not see an aggressive pricing this week, as the fed funds futures already price an almost 100% chance for a 75bp hike in FOMC’s July meeting.