By François Rimeu, Senior Strategist, Crédit Mutuel Asset Management

The price of oil declined by 20.78% during June after the 19.26 % drop in May. This massive drop of 36% since the end of April (the biggest two-month decline since November 2008 excluding the Covid period) completely cancels out the increase in previous months and is likely to have significant consequences in the coming months.

The “restrictive” comments from central banks in recent months are likely to be toned down during the summer. Inflation swaps (2y2y forward) are almost back to their pre-crisis levels, which could lead the Fed and the ECB to revise their inflation forecasts down at their September meetings. As growth forecasts have been revised downwards overall during this period, it will be difficult for central banks to raise rates in autumn, in our view.

This fact is clearer for the ECB than for the Fed, as the economic climate is faring better in the US. The strength of US consumption illustrates this point well with a 10% year-on-year rise for the Redbook. However, we think that Kevin Warsh will likely take advantage of the lower oil price to keep rates unchanged. Moreover, our interpretation of the situation is less restrictive than the markets’ with regard to Kevin Warsh following his first press conference.

It therefore seems likely that the summer months will see the yield curves steepen again following the de-pricing of anticipated rate hikes.

The drop in energy prices should also impact equity markets; mainly because the reduced inflation risk is good news for them. This could mean not only a better tendency in fixed income markets, but above all less pressure on input prices and consumers.

The rally of recent months, which has been concentrated on Tech and semi-conductors, could broaden to other sectors. Cyclicals, financials and, as has been the case lately, technology, should therefore do well in the coming weeks, in our view.

The earnings season, which begins in a few days, should also provide support for markets, with (as per usual) likely upward revisions in the US.

Tariffs, a potential topic for the summer

Gold and gold equities, the biggest losers of recent months with declines of 24% and 34% between the end of February and the end of June, could respectively, regain a little momentum.

Everything seems to point to a generally positive summer, especially considering that investors’ current positioning is close to neutral today, and therefore quite far from the exuberance markets have occasionally displayed.

Tariffs could, however, rapidly become an issue for investors again. The US trade balance and current accounts once again came out well below expectations, which could pose a problem for the Republican administration.

The summer is also filled with various renegotiations (USMCA, expiry of Section 301 on 24/07) which the Trump administration could take advantage of to put a little more pressure on its trading partners. The tax revenues from customs duties would be between $100bn and $150bn, less than forecasted at the start of the year, which could undermine his communication ahead of the mid-term elections.