In recent weeks, commodity markets have fallen sharply: Oil prices have fallen for the fifth week in a row, hitting their lowest levels since February, while copper prices have fared even worse. Since their highs in March, copper prices have fallen more than 25%, hardly a sign of a booming economy.
In addition, there are concerns about political risk in Italy and the collapse of the government there. In the U.S., balance sheet season is now beginning in earnest, and the picture so far looks a bit worrisome, especially with inflation still rising.
The U.S. Consumer Price Index (CPI) report for June, released last week, has raised fears that the Fed could raise interest rates by 100 basis points at its meeting next week. While that fear has been partially allayed following interventions by two of the most aggressive FOMC members, Fed Governor Christopher Waller and St. Louis Fed President James Bullard, the events of the last meeting are still fresh in the memory.
Both indicated that a 75 basis point rate move should be enough given the 75 basis point rate move in June, which has helped the U.S. dollar come off its peak and stock markets rally.
This week, attention turns to the European Central Bank. On Thursday, the ECB will raise interest rates for the first time in eleven years - most likely by 0.25 percentage points. This is the start of a series of upward interest rate moves. The goal is to contain inflation, which has gotten out of hand. It will be interesting to see how the ECB tries to convince the markets that it has an instrument to keep Italian bond yields in check.
We are watching this development very closely and will base our trading on it.