Reviewing last week's market performance, energy commodities and the US Dollar Index closed higher, while expectations for Federal Reserve interest rate hikes led to a collective decline in global equities, bonds, currencies, and precious metals. This week, the focus turns to whether NVIDIA's earnings report can sustain the fervor in AI-related trading. Meanwhile, Fed rate hike expectations and a strengthening US dollar may continue to exert pressure on gold and risk assets in the near term.
Geopolitical tensions persist. Nearly six weeks after the US and Iran ceased hostilities, a stalemate characterized by "no war, no peace, no talks" remains. Both the UAE and Saudi Arabia reported minor drone attacks, while over the weekend Iran announced it would manage vessel traffic through the Strait of Hormuz via a designated route. Oil prices edged higher in early Monday trading. Concurrently, Russia and Ukraine both launched large-scale drone attacks last week. Until a genuine prospect for peace emerges, global energy prices are likely to remain elevated, implying that inflationary pressures may not ease significantly in the short term.
Could a bond market sell-off trigger a stock market correction? As inflation risks intensified and government bond selling accelerated, global stock markets experienced a sharp collective decline last Friday. Investor attention this week may shift from the weeks-long enthusiasm for AI trades towards the risks posed by turbulence in the global bond market. US inflation in April reached multi-year highs, leading interest rate markets to price in approximately a 40% chance of a Fed rate hike by year-end. This pushed yields on 2-year and 10-year US Treasuries to their highest levels in over a year. The high yield accepted at a US 30-year Treasury auction surpassed 5%, a level not seen since 2007. This suggests the US government will face higher interest costs for future borrowing (refinancing existing debt), potentially exacerbating the fiscal deficit. The global bond sell-off is not solely due to inflation; political instability in the UK and fiscal concerns in Japan drove their respective 10-year government bond yields to their highest levels since 2008 and 1997 (bond yields move inversely to prices).
Rising US Treasury yields helped the US Dollar Index achieve five consecutive days of gains, positioning it to potentially challenge the 99.50-100 range. Equities and precious metals may face continued short-term pressure.
NVIDIA is scheduled to report earnings after the US market closes on Wednesday, May 20th. The performance and guidance from this behemoth, with a market capitalization exceeding $5 trillion, will undoubtedly serve as a bellwether for the stock market, particularly for AI-related trading. Market expectations forecast first-quarter revenue of $79.3 billion, an 80% year-over-year increase, following 14 consecutive quarters of exceeding expectations. NVIDIA's forward 12-month price-to-earnings ratio stands around 27x, notably lower than other major tech giants. With the current stock price at $225, the median Wall Street target is $270, and Bank of America recently raised its price target to $320. Other companies reporting earnings this week include retail giants like Home Depot and Walmart. Additionally, news that SpaceX is set to list on the Nasdaq on June 12th could provide fresh momentum for US stocks.
Economic data releases this week include April CPI figures from Canada, the UK, and Japan, which will offer a more comprehensive view of the impact from the Iran conflict. Australia will also release its April employment data on Thursday. The release of the Federal Reserve's meeting minutes (Thursday, 02:00 ET) will reveal the internal discussions and diverging views from Chairman Powell's final meeting.
According to the chart, gold (XAUUSD) suffered a 3.7% decline last week as the US Dollar Index rallied for five straight days. The weekly chart formed another bearish engulfing pattern, while a four-day losing streak on the daily chart and a break below key support also suggest bears are gaining control. Early Monday trading saw a dip below the $2,350 level. From a short-term technical perspective, the previous low around $2,350/2,360 may provide some support, but the risk of a resumption of the downtrend after a brief pause remains. A bearish view is maintained below $2,380/2,400. A break below $2,330 could see a test of the $2,250/2,290 area, where the rising trendline and 200-day moving average converge.
Despite multiple rounds of foreign exchange market intervention by the Bank of Japan, the yen remains weak. From a macroeconomic standpoint, inflation is exacerbating pressure on Japan's economy and fiscal situation, negatively impacting stocks, bonds, and the currency. Technically, according to the chart, the 155-155.50 range for USD/JPY warrants attention. It is noteworthy, however, that from last week into the start of this week, the primary driver for the pair's upward movement has shifted from yen weakness to US dollar strength. If the Bank of Japan refrains from further intervention or strong hints of a rate hike in the near term, a resurgent US dollar could propel USD/JPY to challenge the 160 level again.
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