I Want to Break Free; Index Style

Western Wins

European stocks rallied Friday, picking up the head of steam from Wall Street after a solid day in the US. The S&P 500 and Nasdaq closed at their best since August 2022, with tech leading the charge – NVIDA just won’t quit (AI play) and is up 116% YTD. Meanwhile this morning the DAX pushed up towards a record high – 16,290.19 is the magic number. Asian markets were more mixed as soft results from Alibaba weighed a bit on sentiment but the Nikkei closed at its best since 1990. The FTSE 100 added about a third of a percent to 7,770.

Is it over? I don’t think so. Remember Bear Stearns blew up the same weekend as SVB did this year – the rally lasted a couple of months before it all fell apart. Question is whether megacap tech can keep the ship right, or can momentum get a kick on from the laggards? These breakouts look more like head fakes…Fed can only hike into this kind of environment.

Indexes Improve

SPX/NDX/DJI – SPX finally broke out to 4,200. DJI is testing the top of the megaphone, sitting a confluence of MA support, potential bullish MACD crossover to come? NDX up by a fifth this year now.

Dancing on the Ceiling

US debt ceiling talks are going somewhere...this has helped lift the mood for sure. But I would question whether it can last if a deal leads to a tonne of issuance that pushes up yields and leads to tightening. Treasury yields rose with the 10yr to 3.65%, coming off a touch at the moment but still firmer overall. That added to pressure on gold, which extended its losses for May yesterday, with pressure also coming from the stronger dollar. Prices firmed up a touch this morning to $1,966.

Hikes More Likely

Markets are increasingly leaning in to a June hike – as I said at the start of the month after the Fed’s May meeting, the job Powell had was not to signal a pause in June but to leave the door open to hiking again. Why hike? The jobs market won’t quit – continuing claims down below 1.8m yesterday and initial claims down as well; GDP trackers pointing to acceleration; and inflation still sticky. Dallas Fed President Lorie Logan said the economic data doesn’t call for a pause in June. I just don’t see how the Fed pauses in June at this rate.

Land of the Rising Yen

Japanese inflation is at its highest since 1981. Core consumer inflation stayed well above the central bank’s 2% target in April, hitting 3.4% yoy as forecast...BoJ under pressure but sticking to view that inflation will come down. USDJPY dipped sharply after hitting its highest since November yesterday as traders saw the inflation data as nudging the BoJ towards doing something akin to normalisation.

Elsewhere the dollar is still on a roll as markets get behind more Fed hikes. Sterling trades at the 50-day SMA support.