The Portuguese markets experienced a decline yesterday as a result of the resignation of the Prime Minister due to an investigation into potential corruption related to lithium and hydrogen projects. The Portuguese PSI 20 index dropped by more than 2.50% due to political concerns and uncertainty. However, the scandal did not have a significant impact on other European indices, which remained relatively unchanged. The Stoxx 600 index maintained its position around 445, which was previously a support level that has now become a resistance level. The overall outlook is negative due to the slowing economic activity in Europe. In addition, the EUR/USD exchange rate fell below 1.07 as the US dollar continued to strengthen for a second consecutive day.
Yesterday was an interesting day regarding discussions from the Federal Reserve (Fed) and the market’s response to these discussions. Several Fed speakers, such as Neel Kashkari and Michelle Bowman, conveyed a cautious message to the market that the Fed’s efforts to combat inflation are still ongoing and tightening measures could continue. However, the market seemed indifferent to these comments, with a resolute reaction of “whatever”. In response, the US 10-year yield dropped below its 50-day moving average, the 2-year yield remained below 5%, and the gap between the two yields is widening once again. This is primarily due to the prevailing expectations of a dovish stance from the Fed following the recent soft US jobs data and the Fed’s decision to postpone any further action for another month. This week, Fed President Powell is scheduled to speak and is expected to echo the sentiments of his colleagues, emphasizing that the fight against inflation is not yet over and that future decisions will be guided by economic data. However, despite these possibilities, investors have already made up their minds and are trading with confidence based on the belief that the Fed has concluded its hiking cycle.
I believe that if the inflation numbers don’t increase significantly, the Federal Reserve will stop raising interest rates. However, because of the excessive optimism in the market and the decrease in yields, the Federal Reserve will strengthen its position to prevent financial conditions from easing too quickly. A decrease of 50 basis points in the US 10-year yield and a strong comeback in the equity markets will not be beneficial in controlling inflation. As a result, I anticipate that the bond rally will begin to slow down when the 10-year yield approaches the 4.50% level, and I expect the 2-year yield to rise above 5%.
The S&P 500 has been above its 50-day moving average for the third consecutive day, while the Nasdaq 100, which is sensitive to interest rates, has broken through its downward trend. Currently, the S&P 500 has an earnings yield of approximately 4%, and the Nasdaq has a yield of 3.70%. This suggests that the Federal Reserve should consider reducing interest rates, and sovereign yields need to decrease further in order for these returns to be attractive. This uncertainty is why the rise in equity markets seems unstable. It is advised to invest in non-cyclical, value stocks. US equities may continue to perform better than those in Europe and China.
Crude Oil Below 200-DMA
Yesterday, the price of crude oil dropped nearly 5% after the $80 per barrel support level was unable to withstand the increasing pressure from aggressive bears. The price quickly fell below the 200-day moving average, close to $78 per barrel, and is currently stabilizing below this level. The trend and momentum indicators are showing negative signs, but the Relative Strength Index (RSI) suggests that crude oil is nearing oversold conditions and a correction may be on the horizon. It is anticipated that buyers will enter the market in the $75 to $77 per barrel range, and there is potential for a correction up to the $80 to $82 per barrel range, although there is limited upside beyond that. There is a possibility of a sudden increase in price due to supportive geopolitical news, but even with factors like the Gaza war, Iranian warnings, and OPEC and Russia’s production commitments, the market is still influenced by the slowing demand and supply concerns, keeping it in a bearish state. In the US, crude oil remains in a bearish trend below the $85 per barrel level.