Geopolitical risks in the Middle East are declining. China kept interest rates at lows :: InvestMacro

By JustMarkets

On Friday, the Dow Jones (US30) Index gained 0.56% (for the week -0.23%), while the S&P 500 (US500) Index fell by 0.88% (for the week -3.54%). The NASDAQ Technology Index (US100) closed negative 2.05% (for the week -6.11%). The S&P 500 (US500) fell to a one-month low, and the NASDAQ (US100) fell to a 2-month low. Weak corporate news and rising geopolitical risks weighed on stocks.

The latest escalation in the Israeli-Iranian conflict (an Israeli drone attack on Isfahan in Iran) caused risk assets to fall sharply across all markets. But Iran later said it had “no immediate plans” to retaliate, hoping to pull both sides back from the brink of full-scale conflict. That helped cushion the decline somewhat at last week’s indices close.

On Friday, Chicago Fed President Goolsbee’s hawkish comments supported the dollar when he said that inflation progress has stalled in 2024. It makes sense to wait and get more clarity before cutting interest rates. So, markets now expect the Central Bank to hold rates steady until September and to make no more than one rate cut this year. That’s an optimistic scenario for the US dollar.

Netflix (NFLX) shares fell more than 8% after the company projected second-quarter revenue below consensus. Demand concerns are weighing on chip stocks after Taiwan Semiconductor Manufacturing Co (TSM), the world’s largest maker of advanced chips, lowered its expectations for semiconductor market growth this year to 2024.

The House of Representatives quickly approved $95 billion in foreign aid for Ukraine, Israel, and other US allies in a rare Saturday session as Democrats and Republicans united after months of stiff resistance from the right over renewed US support to repel a full-scale invasion by Russia.

Recent volatility in the Mexican peso (MXN) caused by rising tensions in the Middle East is no cause for concern over inflation, the governor of the Bank of Mexico (Banxico) said, amid expectations that the central bank will continue to be cautious in its upcoming monetary policy decision. The Mexican peso, considered by many to be a proxy for risk assets, fell the hardest on reports of rising tensions between Israel and Iran, though it later recovered most of that fall. The peso has been the best-performing primary currency over the past 12 months.

Equity markets in Europe were mostly down on Friday. Germany’s DAX (DE40) was down 0.56% (for the week -1.12%), France’s CAC 40 (FR40) closed down 0.01% (for the week -0.36%), Spain’s IBEX 35 (ES35) lost 0.33% (for the week +0.57%), and the UK’s FTSE 100 (UK100) closed positive 0.24% (for the week -1.25%).

On Friday, ECB Governing Council spokesman Simkus said that the Eurozone can afford a less tight monetary policy and that the ECB’s three rate cuts this year align with the baseline. Thus, the European Central Bank intends to change its economic policy stance and cut interest rates soon. According to most ECB voting officials, the likely start date is the next meeting in June.

WTI crude futures fell to $81.5 a barrel on Monday, falling to four-week lows amid easing geopolitical concerns in the Middle East. Iran downplayed apparent Israeli strikes on its territory last week and said it had no plans to retaliate. Nevertheless, investors continued to watch the region. Iran is the third-largest producer in OPEC, and it exports most of its oil to China and other countries outside the US financial system.

Asian markets were mostly up last week. Japan’s Nikkei 225 (JP225) fell by 5.09%, China’s FTSE China A50 (CHA50) was little changed in price for the week, Hong Kong’s Hang Seng (HK50) fell 1.60%, and Australia’s ASX 200 (AU200) was negative 2.84%.

In China, the central bank kept the one-year and five-year lending rates at 3.45% and 3.95%, respectively, amid stronger-than-expected first-quarter GDP data and efforts to stabilize the yuan. On the other hand, both rates are at historic lows, reflecting the government’s concerted efforts to stimulate economic growth amid challenges in the real estate sector and persistent deflationary pressures. Investors now await the Bank of Japan’s policy decision later this week.

In Australia, markets are betting that the central bank will start cutting rates later this year. Investors digested data that the country’s unemployment rate rose to 3.8% in March from 3.7% in February, confirming a dovish view on the country’s monetary policy. Investors now await Australia’s first-quarter and March inflation data this week for more clarity on the policy path.

S&P 500 (US500) 4,967.23 −43.89 (−0.88%)

Dow Jones (US30) 37,986.40 +211.02 (+0.56%)

DAX (DE40) 17,737.36 −100.04 (−0.56%)

FTSE 100 (UK100) 7,895.85 +18.80 (+0.24%)

USD Index 106.12 −0.03 (−0.03%)

Important events today:

• – China PBoC Loan Prime Rate (m/m) at 04:15 (GMT+3);
• – Eurozone ECB President Lagarde Speaks at 18:30 (GMT+3).

By JustMarkets

This article reflects a personal opinion and should not be interpreted as an investment advice, and/or offer, and/or a persistent request for carrying out financial transactions, and/or a guarantee, and/or a forecast of future events.