The last week was one where markets sought some breathing room, as the dollar dropped and equities pulled higher. Of note, US stocks salvaged some pride after a relatively poor month in May and ended a run of losses (S&P 500 and Nasdaq saw its streak of seven straight weekly losses end, while the Dow eight).
So, what are the key themes to look out for as we get into June trading? Let's take a look.
Dollar looks to regain some footing
The greenback saw a retreat in the past two weeks, owing much to a cooling off in deleveraging pressures as well as markets pricing in 'peak hawkishness' by the Fed for the most part. Treasury yields came back down and that saw the dollar fall but there is some pushback so far on the week.
EUR/USD hit resistance at its 38.2 Fib retracement level and with inflation coming back into focus this week, helping to push yields higher, the dollar is also regaining some ground:
As things stand, I doubt we'll see such unrelenting gains in the dollar again considering that markets have priced in considerably the Fed's plans and as risk appetite is also seen improving slightly in the past week. A turn in the latter may be a reason for the dollar to regain further ground but the tailwind from Fed hawkishness has at least died down for now.
Hence, any major dollar momentum will require more technical breakthroughs - which have also stalled in the past two weeks.
Bond selling returns on inflation focus
The surging consumer inflation figures in Europe this week is seeing a return of bond selling, as yields shoot higher in the region. That is also spilling over to Treasury yields as markets are getting a bit edgy on the inflation outlook again.
The selling in bonds comes after three weeks of gains, with yields tracking lower during the period. 10-year Treasury yields fell from a peak of 3.20% to 2.70% last week but have now moved up to 2.88%.
Even if markets have priced in 'peak hawkishness' by the Fed and are sensing a lower and sooner neutral rate, there hasn't been a major repricing in that sense to suggest a significant turn in the tide in the bond market.
As such, yields are likely to stay elevated but they may not be chasing fresh highs unless we start to see more resolve by policymakers in combating surging inflation pressures across the globe.
Equities find some relief, finally
US stocks put an end to a really bad losing streak last week and that might offer some breathing room for now.
From a technical perspective, a bounce was perhaps overdue and there might be scope for additional gains. But the storm clouds are still brewing and investors should not forget about that.
Sure, there are positive developments from China but the economic outlook globally continues to be hampered by rising inflation pressures. And that does not look like it will go away any time soon, as the 'peak inflation' narrative starts to get kicked down the road - again.
Lawmakers and policymakers have continued to underestimate inflation developments and the last few weeks may not be any different.
There is talk of a 'bear market rally' with regards to the latest bounce in stocks. It may be a bit early to identify it as that but given the challenging outlook, it is hard to see equities sustain meaningful gains besides any 'relief rally' for now.
In short, markets seem to be sorting out its feet again after the moves from April to early May have stalled. Central bank messaging remains key to the outlook and the bond market will be a focus point to watch in gauging overall sentiment involving inflation and central bank pricing.
