The World Bank said yesterday that it expects growth to fall to 2.2% for the period that includes 2020 and 2024 and that’s the slowest 5-year period since 1990-1994. The slowing global growth expectations somehow keep the global yields subdued, but at 4% yield, the US 10-year bond is expensive and may not have much upside potential left unless fresh data points at softening activity, and ideally a further weakness in consumer prices.
The S&P 500 and Nasdaq consolidate a touch below the December high – and both very close to their ATH. The uncertainty and the lack of clear direction will likely be on the menu until the US inflation report is released tomorrow. In case of a soft, and ideally a softer-than-expected report, the rally in both stock and bonds could carry on. Otherwise, profit-taking is perhaps what’s best at the actual levels.
On the individual level, the Boeing (NYSE:BA) shares continue to be abated on the Alaska Air (NYSE:ALK) incident. Even the news that Boeing posted its largest-ever monthly sales for its 737 Max couldn’t cheer up investors as all 737 Max 9 jets are now grounded until further notice. Boeing’s misfortune is Airbus’ fortune, however, as the Airbus stock hit a record yesterday in Paris.
In the FX, the dollar index is better bid before tomorrow’s US inflation report; the consolidation in US yields prevents a further selloff in the greenback before more clarity on inflation. The downside risks to the dollar prevail as the higher shipping costs due to Red Sea tensions may not show in the December data, hence we may not see the Federal Reserve (Fed) doves take a break this week, but the trade disruptions in the Suez Canal and the rising shipping costs remain a major threat to inflation in the next few months, and that’s a good reason to scale back the Fed rate cut expectations which – with or without the trade disruptions – have become overstretched after the past two-month rally.
Of course, the rising shipping costs concern Europeans as much – if not more – than they concern the Americans. In this context, geopolitical tensions’ relative impact on US and euro area will play a key role in how the central banks would respond to an eventual rise in inflation and how the currencies will settle relative to each other. The European Central Bank (ECB) is much less convinced than the Fed regarding the end of the inflation battle, but the European economies are significantly softer than the US. This means that, even though the ECB continues to fight inflation, the weak economic fundamentals may not let the ECB remain this hawkish for long. And that’s one reason which will likely hold back the euro bulls from loading above the 1.10 level.
Speaking of inflation, inflation in Australia eased to 4.30% in November thanks to a slowdown in food and energy prices. The AUD/USD eased on a softer-than-expected inflation read, yet at 4.30%, inflation in Australia remains well above the Reserve Bank of Australia’s (RBA) 2-3% target range, hence any selloff in AUD/USD should remain limited and could present interesting dip buying opportunities given that the Chinese stimulus measures – that push iron ore prices higher – should also continue to support an appreciation in the AUD/USD to 68-70 cents range.
In energy, the barrel of US crude rebounded 2% yesterday to past $72pb, as the API reported a 5-million barrel decline in US crude inventories last week and some 600K barrels of increase in US strategic reserves. But the weak global economic outlook, combined with the rising global supply concerns - despite OPEC’s efforts to restrict production – will likely keep the bearish trend intact below the $74/75 resistance range. Besides the record US shale production, Russia is also drilling more activity to keep its production levels intact. PS: in the long term, Russia’s frenetic pace of drilling is a red flag about inefficiencies.
In cryptocurrencies, Bitcoin fell after approaching the $48K level on news that the SEC’s post on X, claiming that the commission granted approval of spot Bitcoin ETFs, was fake. Tension among crypto investors is very high right now provided that it’s just a matter of hours before the SEC is expected to announce approval of spot ETFs. Yet, because investors have been buying the rumours of spot Bitcoin ETFs for months, the actual news could trigger a sell-the-fact reaction. Price pullbacks could be interesting entry opportunities for long-term traders, and hodlers, as the approval of spot ETFs will attract a significant amount of capital in the sector and should have a potentially massive impact on the valuations across the sector.