The last trading week in May started with statements of the Federal Reserve not to pay too much attention to inflation. The Fed has published a long list of reasons of temporary nature of inflation spike to calm down markets.
The Fed considers the rise in prices due to the effect of low base that will soon fade along with large social benefits program that has stimulated “emergency spending”.
U.S. monetary regulator fondly believe U.S. consumers would not buy a second refrigerator or a mobile phone, or even a car despite record level of savings. According to Fed’s statement, U.S. consumers traditionally have low inflation expectations, and together with high unemployment levels, it would lower inflation.
Bank of America published its own research claiming that higher inflation is already priced in by the market. Such a bold conclusion BofA made after a survey of money managers that have $500 billion under management. All of them consider high inflation as a major threat at the moment, and for this reason BofA analysts suggest this risk is already absorbed by the market.
We may have an endless confidence to the Fed and BofA, but the macroeconomic reality unexceptionally suggests that increasing monetary supply would have only temporary positive effect on economic growth within not more than a year. After that, growth returns to normal but on the background of higher inflation and higher inflation expectations.
You may consider such academic dispute far from market realities, but it is not. It may propel wrong ideas that would result in severe market correction afterwards. So far market supports the Fed and BofA’s point of view as we saw rising high-tech stocks on Monday, and Nasdaq 100 gained more than 1.5%, while the S&P 500 broad market index rose by around 1%
That could be not a logical behavior of investors considering correction signals coming from cryptocurrencies, debt markets, and crude market. Buying of risky assets may be not a wise strategy at the moment, but the Fed may look extremely conclusively, especially when it pumps billions of dollar in liquidity at zero interest to the market.
Technically the situation for the stock market is not that optimistic as the S&P 500 index is still in a correction zone. However, it is already above the resistance level at 4170 points. If it breaks through 4230 points it would return to an upside trend with the next target at 4250 points. In case the correction scenario would remain on the table, downside targets are at 4060 and 3930 points.
Crude prices are trying to climb higher on possible storm in Gulf of Mexico and potential halt on the Iranian nuclear deal after the negotiation deadline set by Iran expired on Sunday, May 23rd. Brent crude prices returned to a resistance level at $68.40 and are looking to hit $69.60 per barrel, where sell positions with targets at $67 per barrel would be very interesting. If U.S-Iranian negotiations would resume this week crude prices may dive even further down.
Gold prices have consolidated in the range of $1870-1890 per ounce. The U.S. ten-year Treasuries’ yields fell to 1.60%, and may push gold prices to $1900 per ounce. However, we should keep in mind that Israel and Palestine may start cease-fire negotiations any moment. So, any positions in gold would be too risky at the moment.
The Greenback is under pressure this week despite strong macroeconomic fundamentals. The EURUSD is not far from 1.21850 strong resistance level, and that may mean a possible decline to 1.20500 and 1.19400 support levels.
The GBPUSD has all chances to reach 1.42500, where it would be interesting to sell with targets at 1.41200 and 1.40100.
The USDJPY is already below support level at 109.50. That may point to its upside potential, but also to fears over further growth in risky assets. So, purchases are looking good at the moment, but they should be placed with caution.