USD extends gains as investors shrug off Fed optimism

Yesterday was one of those days where we needed to fit a narrative to the market moves as the moves weren’t triggered by meaningful data or comments. The US 2-year yield was steady near the 4.80% level, the stocks were slow to move, the S&P500 traded slightly up, Nasdaq 100 came slightly down. Federal Reserve’s (Fed) Senior Loan Officer Opinion Survey showed an increased tightening in commercial and industrial loan standards. That’s a negative hint for the economic outlook, and combined with the latest weakness in the US GDP data suggests that economic conditions could start deteriorating in the US – which would justify a Fed action IF inflation eases. Fed’s Kashkari said that the Fed will keep the rates at the current levels for an extended period of time’ until they are certain’ that inflation is on path to their 2% target. But inflation is on a rising path since the beginning of this year and the Fed shouldn’t cut rates to boost economy. It must address the price pressures first. That’s the theory. So, appetite in US stocks remains supported by robust earnings and Fed optimism, but the earnings expectations look somehow inflated, while the Fed optimism is fragile and data-dependent – meaning that the market could be lacking enough confidence to send these indices to fresh record highs before we have more detail on the US inflation update that is due next week. Today, investors will be closely watching the $42 billion US 10-year bond auction and listen to what the Fed’s Lisa Cook has to say.

On the corporate front, Disney tumbled 10% after giving a weak subscriber outlook, Tesla fell nearly 4% on news that shipments from its Shanghai factory tanked 18% in April despite a positive growth in the EV market. Qualcomm and Intel felt the heat of the news that the US will revoke the export licenses to China, Nvidia retreated 1.72%. Apple on the other hand unveiled new iPads that would carry faster chips that could support the heavy weight of AI computations, but the market showed limited enthusiasm. Everyone waits for the June 10th announcement on AI plans. At this point, the expectations are building so high that if the company doesn’t come up with a robust plan, the stock price could come tumbling down. Meanwhile, Microsoft doesn’t content with its AI advance but does more. It now develops an AI model that is ‘entirely divorced’ from internet to give the US intelligence agencies a safe – unconnected – tool to help them analyze their data without taking the risk of leakage. But even Microsoft fell 1% yesterday.  

In the FX, the US dollar rebounded on a third day as FX traders somehow shrugged off the post-FOMC optimism that was certainly overdone. The EURUSD retreated to 1.0740. The daily graph says quite a lot on the euro sentiment, as the pair tested a major Fibonacci resistance, which also coincides with the ytd descending channel top, and bounced lower. That makes sense in the context of diverging policy outlook between the Fed and the European Central Bank (ECB). The USDJPY threw itself back above the 155 level, as Governor Ueda said they are watching the impact of the soft yen. Gold remained bid above the $2300 per ounce on news that the People’s Bank of China (PBoC) continued buying gold for the 18th straight month, though their purchases slowed. US oil, on the other hand, trades below its 100-DMA and remains in the hands of the bears despite the news that Israeli army entered Rafah yesterday. The tense geopolitical landscape suggests that the risks remain tilted to the upside, the near oversold conditions suggest that it’s a good time for dip buyers to join the market. Yesterday’s API data also showed a small half-a-million barrel build in US oil inventories last week. Therefore, there is a bigger chance to see a rebound in oil prices at the current levels than the contrary. But if the $77pb support is broken, we could see the price of a barrel rapidly retreat to $75pb.