This week, the US Dollar Index surged to 105.14, once again impacting global financial liquidity. As a result, the Dow Jones Industrial Average experienced its largest pullback since the pandemic, influenced to some extent by market sentiment. Despite this, economic fundamentals remain relatively stable. The yield on two-year US Treasury notes hit a high of 5.0%, indicating significant fluctuations in market expectations for dollar interest rate cuts. Base metals and gold also saw substantial volatility this week, as did cryptocurrencies, which experienced widespread turbulence. The volatility in metals and digital currencies far exceeded that of the securities market. The strengthening of the US Dollar Index was driven by the following factors:
- FOMC Meeting Minutes: Released this week, the minutes revealed that Federal Reserve governors still consider US inflation to be highly persistent. Should inflation rise again, rate hikes cannot be ruled out.
- European PMI Data: The Purchasing Managers’ Index for the eurozone climbed from 51.7 in April to 52.3. Officials from the European Central Bank (ECB) indicated a potential rate cut in June.
- Japan CPI and GDP: Japan’s Consumer Price Index fell from 2.6% last month to 2.2%, and Q1 GDP showed negative growth, reducing expectations for prolonged rate hikes by the Bank of Japan.
These factors collectively pushed the Dollar Index higher. From a technical perspective, the 105.1 level represents a key support area; a break above this could trigger significant retrenchments in global capital markets. We advise investors to maintain their current positions and wait for further developments.
Looking Ahead: Super Central Bank Week in June
The second week of June will usher in a “Super Central Bank Week.” Expectations are stable for a eurozone rate hike and no changes to US rates, while the Bank of Japan faces a dilemma between yen depreciation and weakening economic data. Even if the currency expectations for the euro and dollar remain stable, the ECB’s rate cut could impact markets, further boosting the Dollar Index while causing a surge in European stock markets.
Following the Super Central Bank Week, the critical US May CPI data will be released. This will be a decisive indicator for asset price trends. Currently, the market is in a downturn. As May concludes, the market will price in expectations for the May CPI. If the market rises, similar to the reaction to the April CPI pricing, it indicates that the market believes US CPI data is still on a downward trend. Investors could consider initiating positions on the left side, significantly increasing holdings after the CPI data, allowing for a flexible strategy.
China’s Market Dynamics
In China, the A-share index fell back below 3100 points after briefly surpassing this level, remaining relatively stable without triggering market-wide panic. Asset prices are still significantly influenced by policies. The photovoltaic sector saw price increases following industry association meetings; similar effects were observed in the power sector following discussions with companies and experts. However, the real estate sector experienced substantial declines after previous meetings spurred significant gains. The overall upward movement in the real estate sector outpaced the general rise in A-shares. Stocks like Moutai, previously very popular, are now in a state of gradual decline. Overall market liquidity remains limited, with new liquidity being scarce. Most liquidity is flowing into the bond market, which presents overbought risks.
China’s economic progress remains heavily dependent on the real estate sector, but consumer data signals are notably weak. The China Passenger Car Association reported a 5% year-on-year decline in car sales for the first few weeks of May, following a 3.7% decline reported by the statistics bureau in April. This acceleration in the decline of car sales, a major component of overall consumption, is particularly unfavorable for the recovery of the Chinese economy.
