Will the relief rally continue?

The previous week in the financial market was traded under the narrative of the possible peaceful agreement between the US and Iran: the geopolitical risk premiums were erased from the bond market, Crude oil was under pressure, and the market breadth has improved across the board: apart from AI-related stocks, industrial and other sectors have started to rebound.

The US dollar was under pressure too as the deal between US and Iran progressed.

Yields of 30-year bonds of the US have retraced below 5% after the previous week’s spike, driving stock indices and Gold higher. The declining oil future prices are removing the geopolitical risk premium from the market, improving risk appetite.

However, the long-term expectations around the interest rate in the US haven’t changed much. According to the Fedwatchtool, the probability of a hawkish scenario for the year end declined by several percent, which is not a big change.

The long end of government bonds yields remains elevated creating a bear steepening effect. That, in the long run, keeps the US dollar supported. In short, bear steepening is the effect when yields of long-term bonds are consistently kept at higher levels, pushing bond prices lower.

Government spending and fiscal stimulus effects are likely to support higher interest rates too, as the FED will try to prevent inflation from spike.

US Treasury yield curve.

As mentioned earlier, market breadth is slowly improving, raising confidence among investors that the rally won’t be limited to just “AI stocks”.

Along with local softening of the US-Iran narrative, this week might support the industrial sector, and related stocks.. Some industrial stocks have started the recovery from their long-term support areas, preceding the possible recovery of the sector.

However, the stock market now starts correlating with bond markets, and budget and fiscal deficits remain to be the biggest risk, which may drive stocks lower if bonds make another round of selling again.

So the condition for the continuation for the “relief rally” would be lower oil prices and lower yields of long end bonds.

Stock-bond correlation.

The market will closely monitor the situation in the Middle East, and look forward to the publication of non-farm payrolls on Friday.

Now let’s into potential opportunities covering different market scenarios for the week ahead.

BA

The first potential idea on our list is the stock of Boeing Company.

It has started to retrace off the 200-day moving average, and, possibly can exit the long-term trading range. Rapid price swings often occur when the price bounces off important long-term support areas.

This scenario involves continuation of the “relief rally” and ongoing flow of “soothening” news from the geopolitical front.

Boeing company stock CFD, daily chart.

EUR/USD

The second scenario is referring to a possible another round of sell-off in the bond market (in case it happens).

EURUSD is testing the intermediate-term resistance area of the 20-day moving average.

In case it fails to proceed moving forward, it may serve as a resistance and push EURUSD lower in the direction of dominating downtrend.

Yields of 30-year bonds of the US would be in focus.

EURUSD, daily chart.

ETH/USD

Ether is losing pace against BTC, and faces the worsening sentiment, and some crypto influencers claiming “the narrative is done”. The spread between BTC and ETH is consistently growing, making ETHUSD struggle in the current market conditions.

Some ETFs have recorded substantial outflows, keeping the sentiment at the negative level.

If this dynamics continues, it’s possible to observe the escalation of the decline of ETHUSD further.

ETHUSD, daily chart. Source: Exness.com