Analyst
In Europe and Asia, stocks are trading lower today as concerns grow that the recent rally has gone too far, especially as central banks offer no prospect of interest rate cuts in the near future.
In Asia, disappointing hopes for further Chinese stimulus measures ended the recent positive performance. Chinese technology stocks in particular fell sharply. In Europe, too, shares traded lower across the board, with the exception of banks and energy stocks. German pharmaceutical and laboratory equipment maker Sartorius plunged more than 16% after issuing a worrying profit warning. Markets in the U.S. remain closed today for the holiday, but U.S. futures also trade slightly lower in after-hours trading (Nasdaq -0.35% / S&P 500 -0.2%).
Commodity prices are facing headwinds due to concerns about future Chinese demand. Materials stocks are trading significantly lower, while energy stocks remain stable or even slightly higher.
The markets were able to cope well with the hawkish remarks of Fed Chairman Jerome Powell in recent weeks, especially in combination with the Fed's last week's pause in rate hikes after 10 consecutive rate hikes. The S&P 500 has been rising for 5 weeks now and even closed higher last week than it did before the Fed's "first" rate hike on March 16, 2022.
Optimism has actually pushed the markets well into overbought territory. Hopes that inflation is coming down have also boosted hopes of a soft landing. Europe is also benefiting from the overall improvement in risk sentiment, but is struggling with more stubborn inflation and the prospect of more rate hikes.
Fed officials are likely to reiterate their hawkish stance this week. Fed Chairman Jerome Powell will deliver his semi-annual report to Congress on Wednesday - with more Fed officials expected to make statements later in the week.
Markets are still, or again, optimistic that the Fed is near the end of its tightening campaign and are pricing in just one more rate hike (25 basis points). As long as this is the case, risk sentiment could remain positive, especially due to the strong outperformance of the tech sector, especially AI-related stocks. The USD is experiencing (or experienced) headwinds from expectations that the Fed's tightening campaign may come to an end in July. The EUR is slightly overbought, although the prospect of further rate hikes by the ECB (and the Bank of England) continues to support the EUR (and GBP). I expect slight counter-movements today - with low volatility and trading volume.
Recurring concerns about a slow Chinese economic recovery, despite new talks between the US and China, and signs of more stubborn inflation - especially in Europe - remain risk factors.
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