This week, six major central banks are scheduled to announce their interest rate decisions. The Middle East situation and inflation risks will undoubtedly be the focus. Global central banks may be forced to end the rate-cutting cycle, potentially putting continued pressure on stock markets, while gold bulls and bears will battle around the $5,000 mark.
Middle East hostilities show little sign of abating in the short term, and oil prices may continue their ascent. The conflict involving the US, Israel, and Iran has entered its third week, with neither the US nor Iran showing willingness for ceasefire negotiations. The US has deployed additional military forces to the region, while Iran's new supreme leader issued a statement vowing to continue blocking the Strait of Hormuz and to carry out retaliation.
In the crude oil market, as attack targets have expanded from military facilities to oil and gas infrastructure in Middle Eastern countries, oil-producing nations have been forced to cut production. This supply crisis spurred international oil prices to gain over 40% in March, with potential for further increases. The next target for bulls is the $129 level reached during the initial phase of the Russia-Ukraine war.
Market performance over the past two weeks shows crude oil and the US Dollar Index maintaining a high positive correlation, while exhibiting a strong negative correlation with the S&P 500 Index. This is primarily due to short-term flows into safe-haven assets and risks associated with inflation/stagflation.
The central bank super week arrives, dashing hopes for rate cuts. With six major central banks set to announce decisions this week and inflation risks mounting, the path towards interest rate cuts is likely to be interrupted. Expectations for central bank rate hikes this year are gradually increasing. Current market expectations are as follows:
· Reserve Bank of Australia (Tuesday 11:30) - Probability of another rate hike is near 80%, with room for two more hikes expected within the year. · Bank of Canada (Wednesday 21:45) - Expected to hold rates steady this time, with potential for two rate hikes before year-end. · Federal Reserve (Thursday 2:00) - Expected to maintain current rates, with minor market bets emerging for a mid-year hike. Focus will be on the economic outlook and dot plot for predictions on future inflation and the rate path, suggesting rates could remain high for an extended period. · Bank of Japan (Thursday) - Expected to keep policy unchanged this time, with a potential rate hike in April or June, and possibly another before year-end. Market focus also includes potential intervention regarding the Yen. · Bank of England (Thursday 20:00) - Expected to hold rates steady, with one potential rate hike before year-end. · European Central Bank (Thursday 21:15) - Expected to maintain current rates, with 1-2 rate hikes anticipated in the second half of the year.
However, for non-US currencies, market volatility could significantly amplify this week. While rate hike expectations might offer temporary support, these currencies remain under the shadow of a strong US Dollar in the medium to long term, especially for currencies like the Euro and Yen from countries heavily reliant on energy imports. The Australian Dollar may prove relatively resilient, potentially benefiting from its own hawkish outlook.
Economic data and corporate earnings take a backseat. Amid market dynamics dominated by geopolitics and central bank decisions, the impact of US PPI data on Wednesday and weekly jobless claims on Thursday is expected to be limited.
Regarding earnings, Micron Technology (MU) is scheduled to report after the market closes on Wednesday. The shares of this semiconductor memory giant have risen 44% year-to-date, seemingly unaffected so far by AI-related concerns and geopolitical risks. Among US-listed Chinese companies, the top two giants, Alibaba and PDD Holdings (Pinduoduo), are set to report earnings on Thursday.
A strong US Dollar has led to gold retreating from its highs for two consecutive weeks. In early Monday trading, the price fell below the $5,000 level. In the short term, gold prices may continue the correction that began from the $5,420 peak, with bears gradually gaining initiative.
Technically, the 50-day moving average around $4,950 is a level to watch on the downside. However, if the price cannot reclaim levels above $5,020/50 (the lower boundary of the consolidation range over the past two weeks), selling on rebounds might remain the primary strategy. A more critical support level appears near the rising trendline from August, around $4,840.
Gold's one-week implied volatility has dipped slightly to 30%, suggesting a high probability that prices will fluctuate this week between approximately $4,803.68 and $5,234.68—a range of about $215 above and below last Friday's closing price.
The S&P 500 has been trading in a high-level consolidation for nearly six months, struggling to find a catalyst for a renewed upward breakout. The index has only retreated about 5% from its historical high, potentially not yet fully pricing in the disruptive impact of soaring oil prices on inflation and the economy. Therefore, the outlook remains cautious. Key levels to monitor are support near 6,600 and the risk of a failed breakout. A break below this level could see a test of the 6,500 area, and a sustained drop below that might extend the weekly correction towards the 6,100 vicinity.
Comments