This week
is probably going to be end in disappointment for the stock market. The S&P
500 broad market index is highly likely to close on the downside, making it the
tenth negative week out of the last eleven weeks. The index was losing 2.2% by
Friday. It may rebound somewhat during the last trading day of the week but this
could hardly help it to land in positive territory for the entire week.
There are a
lot of reasons behind the deteriorating sentiment this week as U.S. Treasury
Secretary Janet Yellen said the United States is likely to avoid a recession,
while the European Central Bank’s(ECB) President Christine Lagarde wowed the
investment community by saying the ECB would hike interest rates in July for
the first time in the 11 years.
One may say
that Mrs. Yellen’s opinion is justified as she is trying to support markets.
But she seems to be ignoring alarming signs of deterioration in the U.S.
economy from the fiscal policymakers. This opinion may prompt the Federal
Reserve (Fed) to rest in the complacent hope that everything will work out by
itself somehow. The same could be applied for Mrs. Lagarde. However, the ECB
has less time to deliver a full interest rate hike cycle before markets dive
into a possible turmoil in August or September. The ECB may rise deposit
interest rates from -0.5% to -0.25% or even to zero without ending its
bond-buying programme. But both the Fed and the ECB must react when markets spiral
down and stop monetary tightening or even reverse back to their stimulus policies.
Investors
still hope lower inflation in the U.S. would support markets. But could be such
hopes justified? The May Consumer Price
Index (CPI) consensus is 8.3%, the same as in April. But does this really
matter now as energy prices soared in May and June so far? This would mean
another inflation spike in the U.S. in June and July. In such a situation any
hopes for a rebound are seen to be pointless.
Brent crude
prices crossed the second resistance level at $124 per barrel, opening the path
for prices to jump to $135. The chances for crude prices to lift off towards
$160-180 per barrel are rising.
Gold prices
are in the downside mode until the end of July. This week prices edged up to
$1860 per troy ounce, but quickly scaled back to $1840 per ounce. Once the
$1820 support level is broken, the next targets are seen to be at $1730-1750.
Thus, short positions on gold should be kept.
EURUSD is
within an aggressive upside pattern with the targets at 1.07500-1.08500 which
have already been reached. The pair rolled back to 1.06000 and may rebound in
the short term. However, there are no good entry points so far, as the pair may
continue to slide down next week.
GBPUSD is more
interesting for trades after successful short positions that were opened at the
strong resistance at 1.25900-1.26200 and closed at 1.24800. The support level
for the pair could move to 1.23800-1.24000 and this could be used as a target
in case of good volatility if the pair reaches 1.25200-1.25500.