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Geopolitics and the Fed Determine Market Sentiments

INVESTINGGeopolitics and the Fed Determine Market Sentiments

On Friday, negative sentiments prevailed due to ongoing geopolitical tensions. Markets also tempered expectations for Federal Reserve interest rate cuts in response to inflationary risks. After further reports that Israel’s attack did not provoke a swift retaliation from Iran, the situation somewhat stabilized. Ultimately, the Nasdaq Composite lost 2.1%, and the S&P 500 fell by 0.9%, while the Dow Jones managed a gain of 0.6%. The Polish złoty was slightly stronger but still significantly weaker than a week ago.

On Friday morning, news of Israel’s retaliation led to a sharp increase in the prices of gold and crude oil, while yields on U.S. Treasury bonds fell. By the end of the day, however, prices returned to levels seen before these reports. Gold surged briefly, with one ounce costing around 2415 USD. Brent crude briefly exceeded 90 USD per barrel but cost less than 86 USD this morning. The złoty ultimately regained some of last week’s losses but remains weaker than last week. This morning, the EUR/PLN rate rose to 4.32 from 4.30, and the USD/PLN rate is above 4.05.

Currently, the market does not anticipate a rate cut by the Federal Reserve at next week’s meeting. June’s easing is priced at less than 20%.

In a biannual report on financial stability published last Friday, the Fed stated that “the risk of persistent inflationary pressure leading to a more restrictive monetary policy stance remained the most frequently mentioned risk.” We also heard from Bostic of the Atlanta Fed, who said he personally feels comfortable with the Fed maintaining high, steady interest rates. He emphasized the need for patience before decisions to ease monetary conditions are made. Meanwhile, Austan Goolsbee suggested that it makes sense to wait for greater clarity before taking action, noting that reaching the Fed’s 2% inflation target will likely take longer than previously thought.

In other news, the U.S. House of Representatives passed four bills to provide aid to Ukraine (60 billion USD), Israel (over 26 billion USD), and Taiwan (over 8 billion USD). These bills now await a vote in the Senate.

Last night, the People’s Bank of China left its benchmark interest rates unchanged. The one-year rate remains at 3.45%, and the five-year lending rate at 3.95%.

Last Friday saw no major data from the U.S. economy. This week’s key releases include Q1 GDP on Thursday and the PCE deflator on Friday. Preliminary PMI readings for manufacturing and services in European countries will also be important. Today, the Chicago Fed will release its index of economic activity. At 10:00 AM, the Polish Central Statistical Office (GUS) released a batch of data from the Polish economy.

Łukasz Zembik, Oanda TMS Brokers

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