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June was the month of small growth in financial markets with a certain level of volatility also present, which could have been attributed to the Federal Open Market Commission meeting in the middle of the month. The most important takeaway from the meeting was potential changes in Fed policies. US Stock market reacted negatively with S&P 500 losing 1.37% of its value. Similar situation was observed in the European markets and precious metal.
The US unemployment rate continues its decline and layoffs hit a 21-year low, indicating a recovery in the labor market. Unemployment benefit claims reached their lowest levels since March of 2020. On the other hand, the shortage of workforce is putting pressure on hiring – politicians, businesses, and economists blame enhanced unemployment benefits, including a $300 weekly check from the government. Largely because of this, for the first time in 7 months, there was a decline in the manufacturing sector.
Manufacturing activity in the Eurozone continued to grow in June; raw material costs rose at the fastest pace in two decades. Consumer prices have also increased, but the main reason for this can be attributed to the rise in energy prices.
China’s factory activity decreased in June – Caixin/Markit Manufacturing Purchasing Managers’ Index fell to 51.3 last month from 52 in May. The main reason for this was negative impact of the resurgence of Covid-19 cases in the province of Guangdong and supply chain disruptions. In other Asian countries, higher raw material costs put pressure on manufacturing activity – Japan saw factory activity expanding at the slowest pace in four months and PMI indices of Vietnam and Malaysia also decreased. Indian factory activity contracted for the first time in almost a year as restrictions to contain the second wave of the coronavirus had a drag on demand.
EUR/USD not only failed to reach the 1.2350 region but even fell slightly in June. We see a clear-cut support and resistance areas with 1.22-1.23 being the main resistance zone on the way up and 1.16-1.17 an important support for the pair. There is an increasing probability that in the coming weeks this support area will be tested again.
Unlike May, June was a rather difficult month for precious metals. Both gold and silver showed significant declines. As we mentioned earlier, silver is unlikely to surpass the $30 an ounce mark in its current attempt, but the price of around $25 an ounce is certainly very tempting for the long term purchases. Gold is currently in a slightly more precarious position – we see that in the short term the chance of further drawdown to the XAU/USD 1700-1650 levels has increased.
As most asset classes, the sovereign bond market has been enjoying good weeks as well. One of the key events in the bond market this month was the Federal Open Market Committee meeting in the middle of the month, in which inflation was still characterized as transitory. Fed also hinted at a potential increase in interest rates sooner than previously suggested 2023, which speaks of the fact that Fed is beginning to consider the possibility of cutting existing aid and is studying the market reaction to such a notification. Interestingly, the bond market reacted positively to these announcements, with long-term government bonds prices rising, while corporate bond market did not see any changes.
US stock market rallied in June and is now up by 16% since the beginning of the year. For all the subtle corrections, the S&P 500 is currently trading above 4300 mark and, as mentioned in previous memos, this rally could easily continue to 4500+ before we see any significant decline. A slightly different situation is in the European markets – Stoxx 600 continues to hover near 450–460 levels. It is important to note that the VIX volatility index has now reached its lowest level in a year at 16 points, which speaks of the peacefulness currently reigning in the stock markets.
One of the most significant short-term risks is the regional / global return of the pandemic, as well as doubts over the effectiveness of vaccination. Should new restrictions be introduced and hamper potential demand, inflation concerns will probably fade into the background. However, should inflation continue to rise, the Fed will have to act more aggressively, slowing down the pace of asset purchases and raising interest rates, which should negatively affect equity markets.