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As US risk-free rates slump, Straits Times Index sees mild consolidation

Goola Warden
Goola Warden • 3 min read
As US risk-free rates slump, Straits Times Index sees mild consolidation
The chart pattern of US risk-free rates continues to weaken following the break below its moving averages
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A few short black candles appeared during the week of June 3-7, with the Straits Times Index losing three points week-on-week. Short term RSI tested its overbought line and retreated. On the other hand, quarterly momentum remains intact, and this should continue to support the STI. In terms of longer term indicators, the 50-, 100-, and 200-day moving averages remain positively placed.

The current consolidation phase should find support at 3,300. Following the break above 3,250, and the move above 3,300, the target indicated is 3,450 and this remains valid.

It has indeed been the case that the technical chart pattern of the 10-year US treasury yield had indicated the yields had encountered resistance. The 10-year treasury yield has also fallen below its 50-, 100- and 200-day moving averages at 4.48%, 4.33% and 4.34% respectively. To confirm the weak chart pattern, quarterly momentum has broken below its support / equilibrium line into negative territory. 

As at June 7, the 10-year US Treasury yield has fallen to 4.29% from 4.55% a week ago. The support/ neckline of the chart pattern is at the 4.20% to 4.22% range. A breakdown would lead to the 10-year yield falling to below 4%.

Although the breakdown appears to be a remote outcome, markets can be notoriously volatile.

See also: REIT index breaks out of a base formation as risk-free rates flounder

During the week of June 10-14, key US data to be released just hours before the June 12 FOMC meeting include US May CPI (Bloomberg estimates 0.1% m-o-m, 3.4% y-o-y); and core CPI (which Bloomberg estimates at 0.3% m-o-m, 3.5% y-o-y). 

UOB Global Economics and Markets Research says, “There was some reprieve as both April’s CPI and PCE (personal consumption expenditure) deflators were seen as cooling in the right direction after the 1Q2024 upside surprise. While we still expect headline inflation to cool further into 2024 (in part due to base effects) the slower than expected pace of easing for accommodation costs, services inflation remained stubbornly elevated and upside energy price risks, are inhibiting a faster pace of CPI descent.”

If inflation resumes to “behaving badly” in the next few months, then that “easing” equation from the Federal Reserve will be in further doubt, the UOB report adds.

See also: Who will save Sabana REIT?

In Europe, the European Central Bank (ECB) has announced that its three main policy interest rates will be lowered by 25 basis points – the first cut in rates in almost five years. The move was unanimously expected by economists and almost fully priced by financial markets following strong hints of imminent easing by members of the Governing Council.

“Attention now turns to the future pace of easing which remains uncertain. An above-consensus rise in May’s Harmonised Index of Consumer Prices (HICP) inflation rate to 2.6% year-on-year had raised questions as to whether the ECB would cut at all. The unexpected print also clearly influenced the press conference communication following the decision,” a Schroders update points out.

ECB projections for the headline annual inflation rate were raised for this year from 2.3% to 2.5%, and from 2% to 2.2% for 2025. However, the projections for 2026 remained unchanged at 1.9%, suggesting ongoing confidence that policy will return inflation to target, Schroders adds.

During a press conference, ECB president Christine Lagarde explained inflation could fluctuate above target for the rest of this year and into next year, before returning to the 2% target in the second half of 2025.

 

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