It was yet another day, and another record high for the US major stock indices. The S&P 500 traded to 4930 for the first time, driven higher by falling US yields after the US Treasury surprisingly cut its quarterly borrowing estimate, on hope that five of 7 Magnificent stocks will surprise positively when they reveal their results this week, and on hope that we might hear something relatively dovish from the Federal Reserve (Fed) meeting this week.
The dovish Fed expectations prevent the US Dollar Index from making a decisive move above its 200-DMA. Investors expect the Fed to cut the rates from May and the dollar to lose value this year. Yet the Fed’s path to rate cuts may not be as swift as many believe if inflation numbers start looking bad again. Rents – which are the main responsibility of the remaining inflation pressures are expected to ease and be the major driver of inflation to the Fed’s 2% target, yet gasoline prices which fell more than 50% since the summer 2022 peak to the end of last year, and which helped bringing inflation down from a 9% peak, start showing signs of rebounding since the start of the year. For now, the rise is not alarming, but the base effect will likely play against the falling inflation trend in the next few months. It will be interesting to see if the rise in rents fall sufficiently and soon enough to temper the rise that we see today in energy prices. The latter may or may not prevent the Fed from cutting in the H1, but it will help investors to scale back their 150bp cut expectations for this year. And that could help alleviate the US dollar.
Elsewhere, the EUR/USD has been benefiting from limited courage to sell the US dollar, but the pair is extending losses below its 200-DMA on the expectation that the European Central Bank (ECB) can’t keep its interest rates at the current levels with the sputtering economies. This morning, the Eurozone countries will start revealing their inflation and growth updates. The euro area’s aggregate GDP for Q4 is due today, and inflation for January is due on Thursday. The lower the growth, and the slower the inflation, the sooner the ECB will cut rates. But if inflation surprises to the upside, we could see a part of the ECB dovishness vanish, even with gloomy growth numbers. We shall see support in the EUR/USD into the 1.0793/1.0775 – area that includes the 50% Fibonacci retracement on the October to December rebound and the 100-DMA.
In energy, crude oil remains upbeat after last week’s positive price breakout above $75pb and the rising tensions in the Red Sea region as everyone is now expecting the US response to the latest attacks. US crude saw resistance into the $80pb level yesterday and we could see consolidation between $78/80pb before a potential breakout above the $80pb psychological level. Oil stocks are better bid with the rising oil. Exxon (NYSE:XOM) rebounded more than 7% since last week and could well break above the September-to-now descending channel if Friday’s results satisfy investors.
And oh, green transition goals are being thrown to the garbage. Yesterday, a hedge fund called Bluebell asked BP (NYSE:BP) to cut spending on clean energy and boost its oil and gas investments instead. They said that ‘BP is preparing to operate in a world that BP should know will not exist’. Anyway, BP and other oil companies will likely see the benefits of rising oil prices. BP looks like an interesting long with a 500p target.