Several major central banks have already cut key interest rates in a coordinated manner. At one time, our Fed also planned to be a part of these June rate cuts, but rising inflation postponed those plans. There is a possible result of this new trend: a resumption of the carry trade, which may attract more bids on Treasury bonds, due to their higher relative rates to the euro and other competitors. Over time, that could lower Treasury rates, which could convince the Fed to cut rates, too.
June is also typically a positive month for small- and mid-capitalization stocks that will soon be added to the Russell indices. Russell typically publishes its proposed changes on the first Friday in June, and then it refines its proposed index changes over the next two weeks. As Russell adds some stocks to its Russell 1000 and 2000 indices, those stocks typically “pop” on institutional buying pressure.
Also, on June 5, Nvidia (at $3.012 trillion market cap) passed Apple ($3.003 trillion) in market size and may soon pass Microsoft ($3.151 trillion). I expect that Nvidia will become the first company to reach a market capitalization of $5 trillion in the next couple of years and become The Magnificent One!
Here are the most important market news items and what this news means:
• The biggest news this week will not be the Fed’s Federal Open Market Committee (FOMC) statement on Wednesday, which will be scrutinized for dovish “tidbits.” Instead, an updated “dot plot” by the FOMC members will be the big news, since it will signal how many key interest rate cuts the Fed will likely implement this year and in 2025.
• Crude oil prices have risen this week after Goldman Sachs analysts said the Brent light, sweet crude oil should rise to $86 per barrel in the third quarter due to summer fuel demand. Goldman Sachs predicted a trading range of $75 per barrel to $90 per barrel for Brent crude oil. Crude oil also remains hypersensitive to worldwide economic growth, so as Europe and other major economies recover as central banks cut key interest rates, then crude oil prices are expected to meander higher. Overall, the strong seasonal demand that drives crude oil higher in the summer appears to be underway.
• I remain worried that Ukraine’s attacks on Russian refineries, export terminals, and the Trans-Siberian railroad mean that the next big target is the Russian Arctic crude oil pipeline, which would send crude oil prices to over $100 per barrel.
• Vice President Kamala Harris and National Security Advisor Jake Sullivan this week are attending a peace summit regarding Ukraine in Lucerne, Switzerland. I suspect that a more serious peace deal between Ukraine and Russia will ensue in the upcoming months, since otherwise, the death toll from the fighting will be intolerable. President Zelensky needs to make a peace deal ASAP, since otherwise he may not have any leverage in light of the rightward shift in Europe (with the exception of Britain, where Labour is expected to win) and a possible Trump victory in the United States.
• The EU parliament elections resulted in a definite shift to the right, especially in France and Germany, so the new ruling coalitions are expected to (1) be less willing to implement aggressive climate action, (2) be less immigration friendly, and (3) more skeptical about aiding Ukraine. Obviously distraught at the parliament elections, French President Emmanuel Macron called a snap parliament election for France. Exit polls in France gave the Rassemblement National (RN) party 31.4% of the vote, which was more than double the vote to Macron’s Centrist Alliance party with 14.6% of the vote. The RN party is led by firebrand Marine Le Pen, who picked an exciting young leader, Jordan Bardella who is only 28 years old and will be harder to demonize by Macron and other opponents. As a result, a new French Revolution may be underway.
• The G7 meeting is in Italy this week and it will be interesting what their official communique states due to the recent rightward tilt in Europe. I suspect the G7 will agree on support for Ukraine and some climate goals, but the leaders in France, Germany, and the United States may all be replaced in the upcoming months by more conservative leaders. Since Italy is led by a right-wing leader, Prime Minister Giorgia Meloni, who despises French President Macron, it is possible that the G7 communique will heavily be influenced by Meloni since she is notoriously feisty and the G7 host.
• In the United States, stocks are expected to be increasingly impacted by the “mean reversion” trading algorithms that Citadel implements after each earnings announcement season winds down. These algorithms like to hit stocks that are overbought and are typically based on a non-linear neural algorithm that becomes unwound as volatility increases. The former algorithmic traders that I have questioned have reluctantly hinted that these mean reversion algorithms typically last 10 to 12 trading days, but it all depends on how fast volatility increases.
• The annual Russell realignment is proceeding and for the next two Fridays, Russell will refine its proposed changes to the Russell indices. Small and mid-capitalization stocks that are added to the Russell indices on June 24th are typically the biggest winners. After this annual Russell realignment, quarter-end window dressing is expected to boost many of our fundamentally superior stocks as many institutional investors make their portfolio “extra pretty” before their quarter-end reviews.
Overall, the market continues to digest the recent highs, with continued uncertainty on Fed timing, guarded optimism on the consumer, an unusual election cycle, and the distraction of surprising election results in Europe. Momentum remains positive.
