It was a relatively low volatility week across major asset classes, as traders likely held back from action while awaiting developments on the US debt ceiling issue.
Volatile catalysts such as global PMIs and inflation updates have usually kept the US debt story back, which ultimately ended up being a positive for risk traders on Friday after a quick round of updates throughout the week.
Notable economic news and updates:
🟢 Extensive arguments about market risk
Over the weekend, a White House official said debt-ceiling negotiations would resume early this week, though House Speaker McCarthy lamented that talks had “slumped” in Biden’s absence.
Crude oil prices got a boost from lower inventory levels as a heatwave in Asia increased demand for fuel oil to power air conditioning facilities
HCOB Flash Eurozone Services PMI at 55.9 vs. 56.2
Flash index of US services business activity: 55.1 vs. 53.6 previously
US Preliminary GDP reading for the first quarter of 2023: 1.3% qoq; The price index came in at 4.2% qoq (4.0% qoq forecast) vs. 3.9% qoq
On Friday, there were reports that Biden and McCarthy were “closing” a US debt ceiling deal
Extensive arguments for deflecting market risk
Fitch’s credit rating put the US on “negative watch” due to the debt ceiling impasse
HCOB Flash Eurozone PMI for May: 44.6 vs. 45.8
German GDP for the first quarter of 2023 was revised from 0.0% to -0.3%, after a fourth-quarter decline of 0.5%, and business and consumer confidence indicators point to weaker economic conditions.
US Flash Manufacturing PMI in May: 48.5 vs. 50.2 prior
The FOMC meeting minutes showed that members were “unsure” about how much tightening might be needed
Stronger-than-expected UK CPI figures raised the possibility of a wage price spiral, with Bank of England Governor Bailey expressing concerns about stick inflation.
China’s leading CB index rose 0.6% month-on-month in April, after the previous figure was raised by 0.3%.
The RBNZ raised the OCR 0.25% as expected, but highlighted concerns about global growth, weak inflation and weak business demand conditions, suggesting rates may have peaked.
Weekly global market summary
Dollar, Gold, S&P 500, Bitcoin, Oil, US 10-Year Yield Overlay Planned by TV
After positive sentiment last Friday, investors settled back into a gloomy mood at the start of this week, after US debt ceiling negotiations collapsed over the weekend.
Neither the White House nor House Republicans seemed willing to budge on their demands, with House Speaker McCarthy noting that neither side was “nowhere” close to reaching an agreement.
Adding to the pressure, US Treasury Secretary Yellen reminded that the government could end up defaulting on its debt by June 1st, causing market sentiment to deteriorate again in the middle of the week.
Risk off flows mostly weighed on commodity currencies, particularly the New Zealand dollar which was reeling from the dovish turn and the RBNZ’s rate pause signal earlier in the session. Concerns about a weak economic recovery in China also affected minerals such as copper and iron ore.
In Europe, data from Germany reflected weak business and consumer confidence, while a stronger-than-expected UK CPI also raised fears of a wage and price spiral.
Higher-yielding assets released by the FOMC meeting minutes during Wednesday’s US session did not help keep the door open for another hike in June, as policymakers noted that wage growth was well above the 2% inflation target.
The main beneficiary of these moves was the US dollar, which was able to post consecutive days of gains as traders trimmed bets of a Fed rate cut.
Surprisingly, US stocks also managed to post a rally in late market hours on Thursday as the tech sector got a boost from upbeat AI-related forecasts, especially for Nvidia.
However, risk sentiment in general remained volatile in the trading sessions on Friday after Fitch Ratings placed the US on “negative watch”. Also, a spokesperson for Moody’s Investors Service said that the June 15 coupon payment for the Treasuries would be critical to avoiding a downgrade.
But by Friday’s session in the US, traders were heavily into risk mode after news hit the wires that negotiators from the White House and Republicans had tentatively resolved most of the key issues in the deal. It is also possible that risk sentiment was affected by the upbeat rhetoric from officials that the deal is moving slowly.
This led to a rise in all major assets, especially risky ones like stocks and cryptocurrencies; Gold was the exception as it drifted lower during the US trading session, likely due to the low odds of a catastrophe in the financial system.
During this time, we also received another hot inflation update from the highly anticipated US PCE Event Edition. Normally, this scenario tends to push risky assets lower as the odds of a longer central bank tightening/higher interest rates increase, but stocks and cryptocurrencies held ground, and oil prices rose into the weekend close.
