US and European futures are trading lower once again as investors are unclear about the global economy’s health due to soaring inflation and hawkish monetary policy. The optimism about China rolling back some of the restrictions that pushed the stock markets higher yesterday is no longer there. The 10-year Treasury yield is very much in focus among investors and traders. It climbed to its highest level in nearly a month yesterday because investors and traders sold bonds, which took the further steam out of the stock market rally that we saw yesterday. This factor is very much influencing the sentiment today as well.
The fact is that market players do not like to see interest rates going up, and the Fed has made it clear that in their June and July meetings, they will be increasing the interest rate by 50 basis points in each of the meetings.
Something that can derail the plan is the US CPI reading due Friday, as we mentioned yesterday. And the most crucial factor is not that if the US inflation shows that it has peaked, it can provide some short-term relief for the US equity market. However, the matter that needs attention is how long it will take the US CPI to reach its normal level, and this factor could kill the rally again.
Forex Market
Over in Australia, the RBA increased the interest rate by 50 basis points, keeping the AUD/USD forex pair in green. In terms of the market action, the bank’s decision was very much anticipated by the market due to soaring inflation. The bank has already made it clear that it wants to control inflation under every circumstance. The bank believes that inflation hasn’t reached its peak level, and we believe that it will be difficult for the bank to slow down the pace of its interest rate hike before it sees signs of slowing inflation.
Oil
The energy sector is the only sector where investors are less shy in placing bids. Brent and crude oil prices have traded in positive territory earlier today, and the upward trend for the price is very much intact. A lot of this is mainly due to concerns about the oil supply. Yes, Saudi Arabia has played its part in increasing the oil supply. Still, traders know that the amount of oil supply increased by OPEC isn’t enough, as the vacuum of 1 million barrels created due to the absence of the oil is a matter of grave concern. The situation worsens when you look at China and begin to think that economic activity will climb back as the country rolls back its covid-related restrictions.
We expect any retracement in oil prices to remain attractive for traders as they will continue to consider that as an opportunity to bag a bargain. We may not see another stellar rally for oil prices, but looking at the fundamentals, it is clear that oil prices are unlikely to roll back to their normal price level of $60 a barrel anytime soon.
Gold
The precious metal continues to consolidate as the biggest denominator for the price action remains the US inflation reading which is not due until Friday. The US economic calendar is very much lacklustre until then, and only the US CPI reading will bring mammoth moves for the dollar index, which could move the gold price.
So far, the gold price has dipped back into negative territory for this week, and it is barely keeping its neck above water if we look at the price-performance month to date. The last two months have been difficult for the price; we have seen the price retracing its high, even though inflation in the US has been increasing. In other words, gold prices have decreased while inflation has been soaring. The reason is not that gold lost its credentials as an inflation hedge but that the dollar index has seen tremendous strength as the Fed is on the most hawkish monetary policy.
Later on, we have Treasury Secretary, Janet Yellen, speaking today. Her remarks on inflation and the Fed’s monetary policy would be interesting for gold traders as they can bring some meaningful moves for the gold price.
Bitcoin
Crypto traders have been enthusiastic about bitcoin’s price action since the weekend, especially yesterday’s price action gave them a lot of encouragement as they thought bitcoin price may have bottomed. However, those hopes had a reality check today as the bitcoin price has dipped below the critical level of 30K, and the battle between the bulls and bears continues. It is clear that anyone who has bought bitcoin since Jan 1, 2021, is underwater and is a Hodler now.
An important indicator that we all need to pay attention to has a decent track record is a measure of unrealized profit and loss for the network as a proportion of the market cap. This measure indicates that less than 25% of the market cap is in profit, which echoes a scenario equal to the pre-capitulation phase in the last bear market. If a similar capitulation event repeats, we could see the bitcoin revisiting the price level of 25K or even 20K. At 20K, we see much bigger bids coming in and finally marking the bottom for the Bitcoin price.
