The idea of temporary inflation seems to be creeping into the minds of the financial community, helping to calm interest in commodities. Furthermore, we see politicians in different parts of the world engaging in their ways to combat the inflation threat. China announced measures earlier in the week to curb metal prices, quickly cooling the recent overheating.
Oil’s growth trend is again in question. Top policymakers say that nuclear talks with Iran are productive, so they could lift sanctions prohibiting Iranian oil export. This may increase the oil supply, putting pressure on the price. Brent fell below its 50-day moving average, an important uptrend support line since November last year. This is more good news for Iran (and the rest of the world) but bad news for oil prices.
Falling out of the uptrend channel risks creating an additional snowball effect with inflationary bulls shorting long positions. Possibly, the bulls are waiting for a small pullback to level the purchases, so it is worth paying attention to the dynamics of oil near the area of the previous lows at $60-61. A solid decline below $60 will open the way to a deeper correction, potentially $55. Bloomberg also says that pro-inflationary trends are pausing, noting a drop in demand for lumber and house building amid multiple price hikes. At the same time, sawmills are not increasing their production, suggesting the recent boom is temporary.
Moreover, the Philadelphia Fed business activity index fell from a record 50.2 in April to 31.5, much stronger than forecast. At the same time, U.S. 10-year government bond yields went down, and inflation expectations from the markets cooled, indicating a decline of interest in inflation-tolerant bonds.
Lower inflation fears potentially mean stronger support for growth versus value stocks, providing an advantage for the Nasdaq over the Dow Jones. In confirmation of market participants’ optimism, from the side of tech analysis, we now see a test of the 50-day average by the Nasdaq100 and a bounce out of the oversold RSI area, which also indicates that the sell-off is over and buying recovery is underway.