In a move aimed at stabilizing oil markets, the Organization of the Petroleum Exporting Countries (OPEC) and its allies, collectively known as OPEC+, declared on Sunday their decision to prolong supply cuts into the third quarter. However, they also revealed intentions to incrementally reintroduce barrels into the market over the subsequent 12 months. While this strategy provides a roadmap for tapering supply cuts, it was met with a tepid response from oil investors, as it does not align with bullish sentiments.
Following the announcement, the price of US crude initially dipped to $76.50 at the start of the week before recovering to around $77 per barrel. The rebound was partly attributed to upbeat Chinese manufacturing Purchasing Managers’ Index (PMI) data, with the Caixin index indicating the strongest expansion in nearly two years. Additionally, expectations of interest rate reductions by major central banks were seen as potentially offsetting the impact of OPEC’s decision. However, sustained bullish momentum in oil prices may hinge on an improvement in global growth prospects coupled with a more accommodative monetary policy stance from key central banks.
Meanwhile, in India, the Nifty 50 index surged to a new high, and the rupee strengthened as exit polls for the Indian election suggested a decisive victory for Prime Minister Modi’s party. In a separate development, S&P upgraded its outlook for India from stable to positive, paving the way for a potential credit rating upgrade for the emerging market powerhouse. This could lead to reduced borrowing costs for India, further supporting its economic ascent.
The confluence of factors including softer US inflation data, OPEC’s indication of a more lenient supply policy, the robust Chinese PMI figures, and the reaction to the Indian election results contributed to a positive market sentiment on Monday.
Central Bank Developments
On the monetary policy front, recent data from the US revealed that core Personal Consumption Expenditures (PCE) inflation met expectations with a modest 0.2% increase in April, marking the smallest uptick of the year. Moreover, personal spending growth fell short of projections. This combination of subdued growth and inflation figures provided some relief to the market, leading to a more dovish tone by the week’s end. Consequently, the US 2-year yield retreated below the 4.90% threshold after briefly touching the 5% mark earlier in the week. Similarly, the 10-year yield eased below 4.50%, while the S&P500 recovered by 0.80% on Friday, ending the week just 0.5% lower. The Nasdaq managed to close nearly flat, limiting weekly losses to around 1.1%.
Looking ahead, investor focus is expected to shift towards central bank actions, particularly the Federal Reserve (Fed), which is increasingly speculated to consider one or more rate cuts. Attention will also be on the Bank of Canada (BoC) and the European Central Bank (ECB), both of which are anticipated to announce rate decisions this week.
Regarding the ECB, there is a strong indication of an impending rate cut during its June meeting. However, Friday’s Consumer Price Index (CPI) update for the Eurozone presented a challenge to ECB doves, with consumer prices rising higher than anticipated. This development may impact expectations for additional rate cuts in the near term. Consequently, the ECB’s communication regarding its policy stance in light of accelerating inflation will be closely scrutinized, potentially influencing market dynamics and currency movements.
As of now, the euro is trading near 1.0850, with market participants awaiting further clarity from the ECB on its future course of action amidst evolving economic conditions.
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