Currency and Stock Markets. Daily Insights

[stoch]

The long overdue USD pullback has finally happened. What's next?


US 10Y Treasury yield bounced off the key 3% area, dragging down greenback and initiating a chain of pullbacks in other assets that have demonstrated exuberant moves recently. DXY fell 0.6%, the sell-off started from the “round” 101 level as bidding eased on concerns of extreme USD valuation (2-year high), Gold pulled back from the key $2000 level, USDJPY made a U-turn in the area of 129.50.

USD sell-off wasn’t preceded by any new important information on de-escalation of the conflict in Ukraine or a change in the position of the Fed. On the contrary, the “second stage of the special operation” of the Russian Federation in Ukraine is gaining momentum, and some Fed officials such as Bullard, do not rule out a 75 bp rate hike (three standard increases of 25 bp), comparing the recent performance of the US economy with an outstanding second quarter of 1990 when the Fed opted for 75 bp hike. This suggests that the sell-off has been driven by profit-taking trades. Bullish view on the USD is still valid however solid buying pressure will likely reappear when DXY reaches 100 level.

Buyers also steered clear of the idea to buy Gold at critical $2000 level which became the trigger of a profit-taking move. Bearish momentum has been added to initial decline, as a result, the price fell to $1940. Barring major triggers of risk-aversion, the “second leg” of the correction will likely ensue from the $1955-1960 area. If price breaks out below the major trend line and finds little support below it, the sell-off will likely continue till the price reaches $1900. However, price staying above the trend line will likely invigorate bullish efforts and buyers may attempt to retake $2000 level:

The Japanese Central Bank warned that USDJPY movements cause concern, but is in no hurry to intervene. In addition, the Bank of Japan once again announced unlimited purchases of 10-year bonds in the market in order to keep the yield below 0.25%, which once again underlines the striking gap between the Bank of Japan and its peers in terms of tightening policy. USDJPY went below the 128 level, the level of 127.50 remains the focal point for bulls as fundamental background in the Yen has not changed much - due to low domestic rates, Japanese investors will be forced to continue to search for yield in foreign markets, that will hold back the strengthening of the yen. Today it is worth paying attention to the content of the communiqué after the meeting of the G20 finance ministers, where the Japanese authorities can once again draw attention to recent excessive weakness of the yen.

The economic calendar today is not particularly remarkable, markets may pay attention to the US home sales report for March, as well as speeches by the Fed officials, Evans and Daly. Evans said yesterday that he would support the idea of raising rates by 50 bp twice this year. European markets will be watching the Le Pen-Macron debate today to see what chances Le Pen has to narrow down the gap. Polls show significant lead for Macron – 56% vs. 44% for Le Pen.

The pound resists dollar strength with price action being increasingly determined by expectations regarding BoE meeting on May 5th. The bank is expected to hike interest rate by 30 bp. The IMF has reduced growth forecast for the UK economy from 2.3% to 1.2%, it is interesting whether this will somehow be reflected in the Central Bank forecasts regarding policy moves this year. Barring hawkish surprises in the upcoming BoE’s Bailey speech, GBPUSD will likely struggle to rise above 1.31 level:

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[stoch]

Reserve Bank of Australia hikes interest rate, vows to double down on fight with inflation


The 10-year Treasury yield has finally reached an important 3% milestone, however, slipped below the level on lack of bearish consensus, greenback index stabilized at 103.50, the S&P 500 fell below 4100 on Monday, however, there lack of persistence from the sellers helped the index to close in green above the 4100 level. It seems that the dollar finds itself relatively comfortable near multi-year highs as investors expect that the previously outlined path of the Fed tightening and its hawkish dot plot, despite stagflation in Europe and slowdown in the Chinese economy, will remain in place. The RBA hiked interest rate by 25 bp in light of heightening inflationary expectations in the country, signaling that it will do more to contain inflation pressures.

While asset prices have already penciled in the Fed's fairly aggressive pace of tightening, increasing the risk of major disappointment in case of potential dovish tweak of the Fed at the upcoming meeting, lack of appeal of overseas markets relative to the US is currently providing strong support for the dollar, so a dovish impact from the Fed meeting may prove to be short-lived.

The RBA beat expectations delivering 25bp rate hike against the forecast of 15 bp and also announced that it would not reinvest income from maturing bonds into buying new ones, thus effectively putting an end to the QE program. AUDUSD rebounded on the decision which, nevertheless, could present an opportunity to short the pair as the bearish trend remained largely intact. Short-term outlook for risk assets, and therefore currencies correlated with risk demand, remains unfavorable due to numerous signs of a slack of the key economies such as China or EU, which also speaks more weakness for AUD. AUDUSD buyers are expected to provide significant resistance around the January low of 0.6970-0.70:

An important proxy for expectations for the pair is now the covid crisis in China, and judging by the dynamics of the incidence and the tightening of the fight against the epidemic, positive changes will not come soon, which means that the forecast for AUDUSD, in terms of the impact of this factor, remains negative.
EURUSD continues to fight for 1.05, the price is stabilizing near the level, as the market is waiting for more certainty on the Fed's monetary path, which should appear at tomorrow's meeting. The pair may also be pressured by news related to the new package of EU sanctions against Russia, as well as the embargo on oil or gas, as this will directly affect inflation expectations and its negative effects on the European economy. Nevertheless, the EURUSD rate, having fallen to a multi-year low, already priced in enough negativity and risks, so the bar for disappointment seems very high. On the other hand, more verbal intervention by the ECB, in particular from less hawkish members of the Governing Council, could allow the pair to rebound with confidence. A potential breakout of the pair below EURUSD is likely to be accompanied by strong momentum, and it is this nature of the price movement that can become a reliable signal that the pair is primed for a reversal.

The pound sterling, in turn, is waiting for the decision of the Bank of England this Thursday. Stagflation risks have already forced the BoE to soften its rhetoric in March, and investors expect further easing at the upcoming meeting, despite the consensus that the BoE will raise rates by 25bp. The latest data from UK retail sales showed that consumption began to decline in March in response to the significant increase in consumer prices and the risks that policy tightening will burden the economy are growing. The Central Bank understands this very well. The fall of the GBPUSD below the short-term and long-term bearish trend lines suggests that in the event of a movement below 1.25, the pair will most likely look for support at the lows of May and June 2020 (area of 1.21-1.23):

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[stoch]

Preview of the FOMC meeting: balance sheet run-off announcement is the key thing to watch

The Fed is expected to deliver a 50 bp rate hike today and announce the start balance sheet runoff. Markets will be interested in the pace of QT, since this will determine supply of longer-maturity Treasuries on the market in the medium-term which has a great influence on greenback demand. For example, the pullback of 10-year Treasury yields from 3% to 2.92% caused dollar sell-off on Tuesday and also helped EURUSD and GBPUSD to defend critical support levels - 1.05 and 1.25. The pairs continue to stay range-bound ahead of the FOMC meeting:

https://i.ibb.co/jW6hWNN/Screenshot-2022-05-04-at-16-23-14.png


Such dynamics suggests that the pairs could finally choose direction after the Fed meeting, which is unlikely to be limited to one session, since significance of the Fed meeting in May is high. Firstly, the macroeconomic background has changed significantly, it became clear that high inflation will last longer than previously thought, and secondly, a plan to reduce assets from the balance sheet will be made public. This monetary tool, given the amount of funds on the Fed's balance sheet, which is at a record level and amounts to almost $9 tn, will have serious consequences for the US fixed income market:


https://i.ibb.co/vmJsHCk/Screenshot-2022-05-04-at-16-27-42.png

The Fed accumulated on its balance sheet mainly long-term bonds and MBS which means that balance sheet runoff will primarily impact the far end of the yield curve (the aggregate of interest rates on bonds depending on the maturity). The dollar is known to be the most sensitive to the movements of long-term bonds yields so the dollar may respond significantly to the balance sheet decision. A short-term breakout in EURUSD, GBPUSD below 1.05 and 1.25 cannot be ruled out if the Fed simultaneously raises rates by 50 bp and chooses aggressive pace of selling assets, as this will leave the central banks of the EU and the UK further behind in the race to tighten monetary policies. If the rate of balance sheet reduction comes below consensus ($50 billion per month), it will most likely be difficult for greenback to advance to new highs, as the bar for a market surprise is high.

Admittedly, the Fed has plenty of room to act aggressively, with the number of new US job openings reaching a new record high of 11.266 million:

https://i.ibb.co/hgXXS3k/Screenshot-2022-05-04-at-16-35-45.png


It is clear that there is a serious shortage of workers in the United States, which will likely continue to translate into robust wage growth, and hence consumer inflation, since wages are both the costs of firms, which are passed onto final prices, and the basis of consumer demand, which also determines price growth in an economy.

The ADP report released today was somewhat disappointing - job growth amounted to only 247K against the forecast of 395K. However, given the record high number of open vacancies, the data may be interpreted as another signal that employers could not find workers and most likely this was reflected in the growth of wages, which the NFP will tell us on Friday.

During the Fed meeting, the market may also implement the “sell the facts” strategy, this must be taken into account because the markets have probably price in incoming information on inflation, labor market, activity in the manufacturing and services sectors, as well as external supply shocks. A continuation of the dollar rally will likely require shocking Fed action, such as a 75bp rate hike, which is unlikely to happen.

Retail sales in the Eurozone in April did not live up to expectations, growth amounted to only 0.8% in annual terms against 1.4% forecast. Such dynamics complicate the task for the ECB to move to raise rates, but some officials are in favor of a July hike. Nevertheless, the centrists from the Governing Council are silent, therefore, serious catalysts for the growth of the Euro from the ECB, at least until the June meeting, are not expected.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[stoch]

Preview of the FOMC meeting: balance sheet run-off announcement is the key thing to watch

The Fed is expected to deliver a 50 bp rate hike today and announce the start balance sheet runoff. Markets will be interested in the pace of QT, since this will determine supply of longer-maturity Treasuries on the market in the medium-term which has a great influence on greenback demand. For example, the pullback of 10-year Treasury yields from 3% to 2.92% caused dollar sell-off on Tuesday and also helped EURUSD and GBPUSD to defend critical support levels - 1.05 and 1.25. The pairs continue to stay range-bound ahead of the FOMC meeting:

Such dynamics suggests that the pairs could finally choose direction after the Fed meeting, which is unlikely to be limited to one session, since significance of the Fed meeting in May is high. Firstly, the macroeconomic background has changed significantly, it became clear that high inflation will last longer than previously thought, and secondly, a plan to reduce assets from the balance sheet will be made public. This monetary tool, given the amount of funds on the Fed's balance sheet, which is at a record level and amounts to almost $9 tn, will have serious consequences for the US fixed income market:

The Fed accumulated on its balance sheet mainly long-term bonds and MBS which means that balance sheet runoff will primarily impact the far end of the yield curve (the aggregate of interest rates on bonds depending on the maturity). The dollar is known to be the most sensitive to the movements of long-term bonds yields so the dollar may respond significantly to the balance sheet decision. A short-term breakout in EURUSD, GBPUSD below 1.05 and 1.25 cannot be ruled out if the Fed simultaneously raises rates by 50 bp and chooses aggressive pace of selling assets, as this will leave the central banks of the EU and the UK further behind in the race to tighten monetary policies. If the rate of balance sheet reduction comes below consensus ($50 billion per month), it will most likely be difficult for greenback to advance to new highs, as the bar for a market surprise is high.

Admittedly, the Fed has plenty of room to act aggressively, with the number of new US job openings reaching a new record high of 11.266 million:

It is clear that there is a serious shortage of workers in the United States, which will likely continue to translate into robust wage growth, and hence consumer inflation, since wages are both the costs of firms, which are passed onto final prices, and the basis of consumer demand, which also determines price growth in an economy.

The ADP report released today was somewhat disappointing - job growth amounted to only 247K against the forecast of 395K. However, given the record high number of open vacancies, the data may be interpreted as another signal that employers could not find workers and most likely this was reflected in the growth of wages, which the NFP will tell us on Friday.

During the Fed meeting, the market may also implement the “sell the facts” strategy, this must be taken into account because the markets have probably price in incoming information on inflation, labor market, activity in the manufacturing and services sectors, as well as external supply shocks. A continuation of the dollar rally will likely require shocking Fed action, such as a 75bp rate hike, which is unlikely to happen.

Retail sales in the Eurozone in April did not live up to expectations, growth amounted to only 0.8% in annual terms against 1.4% forecast. Such dynamics complicate the task for the ECB to move to raise rates, but some officials are in favor of a July hike. Nevertheless, the centrists from the Governing Council are silent, therefore, serious catalysts for the growth of the Euro from the ECB, at least until the June meeting, are not expected.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[stoch]

Too difficult to resist to buy the dip as S&P 500 tumbles to crucial 4000 points support level

Some stabilization in risk demand after yesterday's sell-off is helping currencies correlated with economic growth expectations (high-beta currencies) to regain some of what they lost yesterday. Against this backdrop, the dollar's rally is being thwarted, but any correction lower could be met with strong support as the Fed has taken a major lead in the tightening race, stagflation concerns have not gone away, and risk asset sentiment remains highly volatile. SPX also played its role when reaching a critical support of 4000 points, which can be perceived by the broader market as a technical buy signal.

Futures for US stock indices are in moderate plus, not exceeding 1%. The catalyst for yesterday's sell-off was broad market panic as central banks signaled their intention to hike interest rates at a time of deteriorating global economic growth prospects. These include stagflation in Europe, risks of a recession in the fourth quarter, continuing devaluation of the yuan as a sign of predicaments in the Chinese economy, as well as high degree of geopolitical risk related to the conflict in Ukraine. It is no surprise that the dollar is holding its positions and is not in a hurry to move into a correction despite the relative overbought (highest level in 20 years). Currencies that correlate with the business cycle were hit more than others, which also indicates the nature of the correction - investors are reducing their exposure in countries that show outstripping growth rate in the business cycle upswing phase. So, for example, since the onset of broader economy growth concerns, AUD, NZD lost 3-4% against the dollar while EUR and GBP losses did not exceed 1-2%:

The slowdown in China affects the economies of New Zealand and Australia, for which the Middle Kingdom is one of the main trading partners while global liquidity concerns primarily affected the Norwegian Krone. Since May 5, the USDNOK currency has risen by almost 5%.
The Fed said yesterday that liquidity in key markets is falling, which could result in investor flight. The warning exacerbated the fall.
The economic calendar today is not particularly interesting, investors could pay attention to the NFIB report on small businesses in the US, in particular, how firms assess the situation with hiring. Also speaking today are a number of Fed officials, the focus is how intensified market correction will affect their forecasts for policy tightening and whether fears of stagflation in the US will be voiced.

Demand for risk will continue to determine currency moves in the short term. Given the potential for SPX to rebound, there may be some demand for commodity currencies (CAD, AUD, NZD), the dollar may go slightly negative. However, as mentioned above, a steady decline in the dollar at this stage is unlikely and long positions on the correction towards 103.50 on the dollar index (DXY) look quite justified.

EURUSD, in turn, may correct higher, however, given the discussion of the oil embargo from Russia, the potential for strengthening above 1.0650 in the next few days looks unlikely. Bullish momentum for the pair can be set by ECB officials such as Joachim Nagel and De Guindos, whose rhetoric will likely be associated with the prospect of a rate hike in July. However, the number of ECB rate hikes this year remains a subject of debate, and it is to these comments that the Euro may be particularly sensitive.

Technically, the pair continues to stay in the range from 1.048-1.060 in anticipation of new important information. Such information will probably be the announcement of an embargo on Russian oil, since in this case the EU will likely face a new round of inflation, which, as the behavior of the pair in March-April has already shown, has a very negative effect on the Euro:

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[stoch]

US April CPI could be the key catalyst for S&P 500 rebound, deeper greenback sell-off


An attempt by S&P 500 to decisively break below 4000 points on Tuesday was not successful, however, the subsequent rebound has not yet found wide support among buyers. Retail and institutional sentiment indicators are in an extremely bearish zone (13-year high), which increases the odds of a rebound in case of emergence of some bullish catalyst:

Today's US CPI release for April appears to be a good potential bullish trigger. Headline inflation is expected at 8.1% (down 0.4% compared to March), core inflation at 6% (down 0.5% compared to March). Core monthly inflation is expected to come at 0.4% and this is where the market will look for a signal that price growth starts to fade as YoY inflation will likely be distorted due to base effects. If MoM inflation falls short of expectations, pressure on the Fed to fight inflation, as the market perceives it, will ease, and policy tightening will shift to a less aggressive pace than has been priced in.

However, three Fed officials (Mester, Waller and Barkin) were quite open yesterday in favor of two consecutive 50bp rate hikes in June and July, after which the Fed will have to conduct an interim assessment of impact of the rate hikes on inflation in order to understand how to proceed further in the second half of the year. Lower-than-expected monthly core inflation will likely help market to rule out the case for 75 bp rate hike at the upcoming meeting, which in itself will already be a bullish signal for the market.

At the same time, the ECB continues to ramp up its hawkish rhetoric. This can be seen from yesterday's speech by member of the Governing Council Nagel. In his opinion, the risk of “late action” has increased significantly, the ECB should curtail its bond buying program as early as July (the ECB spoke about September at the last meeting) and raise interest rate on deposits in the same month if incoming data reveals no signs of inflation easing. Inflation in the German economy was 7.4%, according to data released today.

The continued consolidation of USDCNY around 6.73 at least means that there is one less reason to sell risk today. Tesla CEO Elon Musk described the lifting of the Shanghai lockdown yesterday as "rapid," which is also encouraging. Consumer inflation in China beat expectations accelerating to 2.1% YoY, once again emphasizing that the challenge posed by inflation is global.

The dollar continued to snap back recent gains on Wednesday, the greenback index fell below 103.50 (a weekly low). If US equities bounce today, a stronger move down to 103 will likely follow. According to JP Morgan, the dollar's recent strength is due to a downward reassessment of growth forecasts outside the US rather than the hawkish Fed. Despite the fact that the Fed pushed back on 75 bp rate hike, long positions in USD, according to the bank's analysts, still make sense. In the stock market, JP Morgan sees the defensive sector (companies whose revenues are less correlated with the phases of the business cycle) as the favorite, which tend to outperform in the bear market and hence will draw increased attention from market players.

In my opinion, in the event of a worse-than-expected CPI report today, EURUSD has a chance to make a tactical bounce, given that there is a necessary prerequisite for this – substantial decline in the last few months and range-bound movement, which is a classic technical analysis case for a reversal. The pair is also near the lower bound of the existing bearish channel, which could be also used by market players as an indication of support zone:

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[stoch]

Gloomy China data sows panic, but EURUSD still has a chance to rebound


A glimmer of hope after equity markets’ rebound last Friday was dampened after release of China economic data on Monday. Industrial production in China contracted 2.9% YoY against the forecast of 0.4% growth, retail sales collapsed by 11.1% missing estimate of -6.1%:

Unemployment also rose, from 5.8% to 6.1% in April. The data overshadowed the news that the government are beginning to gradually lift the lockdown in Shanghai, China's major industrial and financial center.

S&P 500 futures were up at the beginning of the session, but after the release of the data, the price went down and found some balance around 4000 points. European markets are in the red ahead of release of the EU inflation data, which is likely to indicate resistance to fading, increasing chances that the ECB will begin to prepare markets for earlier action in policy normalization. In particular, the case with the July rate hike remains the main uncertainty for the markets in the ECB's action plan. Despite the fact that more and more officials are talking about the benefits of a rate hike in July, there is still no final clarity. Therefore, the inflation report has every chance to impress the market, in particular, there is a risk that the Euro may tactically strengthen against the dollar.

Other important updates include an updated Goldman Sachs forecast for the growth rate of the US economy in 2022. The investment bank cut its forecast growth rate from 2.2% to 1.6%, likely reflecting the White House's austerity plan, under which the government intends to reduce the public debt by 1.5 trillion dollars.

The dynamics in the foreign exchange market remains highly dependent on the mood of investors in the stock market, where there are desperate attempts to find a balance after seven consecutive weeks of decline. Local macroeconomic data continues to play a secondary role, especially in non-core economies. The role of the real rate differential has also decreased somewhat (capital flows to where there are expectations of a higher real rate), as anxiety and even panic about stagflation and recession due to the instability generated primarily by commodity markets come to the fore. As long as these factors continue to influence, demand for the dollar is likely to remain elevated. In particular, data on retail and existing home sales in the US may reinforce the view that the US economy is now one of the most resilient to the challenges of stagflation.

If the S&P 500 manages to stay above 4000 today at the American session, which will allow us to consider the state of the market as stabilization, EURUSD will have a chance to grow to 1.05-1.055 (especially if inflation in the EU is higher than the forecast in tomorrow's report), and GBPUSD - to 1.2320, a previous support zone:

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.

High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[stoch]

Flight from risk gains momentum, setting stage for a rally in Gold


The flight from risk assets becomes more apparent on growing concerns about global slowdown and even recession, in particular, markets appear to be pricing in that the US economy will not be able to carry out soft landing (lowering inflation while maintaining positive GDP growth) that the Fed pledged to deliver in spite of aggressive tightening cycle, which led to textbook reactions in various asset classes: stock prices fell, bonds, as safe-haven instruments, rose in price, and the dollar fell, as foreign investors apparently reduced their exposure in US papers.

The magnitude of collapse in US equity markets on Wednesday (the worst in two years), which saw S&P 500 falling by 4% and Nasdaq erasing 5% from its market cap ensured proliferation of bearish momentum to Thursday trading. SPX futures broke below another key threshold of 3900, European indices suffered losses by an average of 2%. Further events are likely to unfold according to the classic scenario: the Fed will bend at some stage of equity sell-off, soften the rhetoric, which will become the main signal for a reversal. But given that most FOMC officials, including Powell, use the word "committed" in their comments regarding the short-term future of the policy, it may take quite a while for markets to see a welcomed policy shift.

The speed and the magnitude of equity markets downside should also imply there are concerns about potential downbeat surprises in corporate earnings and firms’ forward guidance, which, in principle, have already started to materialize. For example, $200bn Cisco released “shocking” earnings report yesterday that fell short of expectations in many respects (including forecast of negative growth in revenue in 4Q against expectations of positive growth), which led to a price drop of 20%:

The situation with covid in China remains controversial, while Shanghai gradually lifts lockdowns, an increase in the number of new cases in Beijing and Tianjin indicates a high risk of new social restrictions in these cities. In particular, a lockdown in Tianjin, a major port city in China, is a major risk for the markets, as it could exacerbate supply chain disruptions, which are well-known for their inflation effects in the countries which import China goods. As the positive trend in the reopening of Chinese economy started to show cracks oil prices were hit hard erasing 8.5% since Wednesday afternoon.

The decline in oil prices and reduced investment demand for the dollar allowed EURUSD to reclaim 1.05 level. Minutes of the ECB meeting are due today, which may offer additional support to the battered Euro as based on the comments of ECB officials, the commitment to fight inflation is gaining broad support in the Governing Council, which is likely to be reflected in the Minutes today. EU money markets price in 100 bp rate hikes from the ECB this year, respectively, the ECB should soon begin to actively catch up with expectations, otherwise the Euro may quickly cede ground to the dollar as monetary policy gap will set to widen again.

The rebound in demand for safe-heavens is not yet so clear, but is already visible in gold, given that we are at an early stage of factoring in recession expectations, the upside potential for gold prices, provided recession expectations take roots, is high. From the viewpoint of technical analysis, the price of gold has been in a well-formed bearish corridor since mid-April, while on May 16 we saw the first signs of a bull market. A breakout of the upper bound of the corridor (~1835-1840 dollars per ounce) could trigger extension of the rally:

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[stoch]

Resilient US consumption helps stock to recover but May NFP could bring Fed tightening bets back into the market



The macro data on the US economy released on Friday showed that high inflation in April failed to stifle consumer momentum in an economy that has a history dating back to post-COVID fiscal stimulus. Although household incomes did not grow as fast as expected (0.4% m/m, vs. 0.5% expected), consumers increased spending by 0.9% m/m, compared to 0.7% expected. The fact that spending has outstripped income growth suggests that consumers are willing to spend savings to maintain lifestyle, which means that consumer confidence may be not so low as depicted in U. of Michigan consumer sentiment data.

Positive US consumer data countered fears that the Fed has taken to tightening policy when the consumer trend approached a tipping point, which could exacerbate the reversal trend, in other words, led to hard landing after the boom. The reassessment of fears led to the fact that the bullish momentum in the US market on Friday did not meet with any significant opposition, which allowed the S&P 500 to close in positive territory by 2.5%, rising to a three-week high:

Core PCE, this time without surprises, retreated from 5.2% to 4.9% in April, which in itself was a very positive signal, given how many times the market has been wrong before, underestimating inflation rates. As the Core CPI and Core PCE went into decline, the market could begin to think that inflation had peaked and would now gradually decline towards the Fed's target level:

On Monday, risk assets are trying to borrow the optimism of last Friday, the main European stock markets are rising, SPX futures added another 1%, approaching 4200. The dollar index is trying to hold support at 101.50, but is under pressure due to rising demand for risk assets. China continues to ease social restrictions and is preparing measures to support the economy. Shanghai allowed businesses to reopen starting June 1, and Beijing authorities said the epidemic was under control, prompting a reassessment of lockdown risks and economic costs in the Chinese stock market, while overseas markets, in turn, priced in lower risks of disruptions or delays in supplies.

The EU continues to discuss the sixth package of sanctions against the Russian Federation, which includes a partial embargo on Russian oil, details should appear today. Brent has topped $120/bbl and time spreads are widening, reflecting market expectations that the near-term demand picture is getting more positive.

Data in focus today: German inflation report. Consumer price growth is expected to accelerate from 7.4% to 7.6%. With the ECB signaling that it will act if the data warrants to do so, an inflation rate in line with expectations or higher could trigger a surge in EURUSD to 1.08 or slightly higher. However, with the release of the May NFP this week, which could dampen the chances of the now hotly-discussed "September pause" in rate hikes, buyers may prefer to wait out the release before adding to long positions, or may take profits. Actually, the execution of such a scenario on the market may lead to a correction towards 1.07 in the second half of the week:

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.

 

[stoch]

Despite expectations of 75 bp rate hike from the Fed tomorrow, Dot Plot is the key thing to watch


US money markets appear to be confident that the Fed will deliver a 75 bp rate hike at the meeting tomorrow. With US inflation trending higher towards 40-year high, a 50bp move, while the target range of Fed interest rate is 0.75-1.00%, clearly presents a risk of losing central bank credibility:

There is also a non-zero probability of a risky 100 bp move which will be shocking in the short term, but possibly more effective in the medium term. Against the backdrop of such expectations, the dollar will likely stay bid at the dips even if equities stage a relief rally today. The dollar index is likely to continue consolidating around 105.

Fear of inflation was a dominating theme for bond and equity markets on Monday as evidenced by rare weakness both in stocks and bonds. Safety could only be found in dollar cash as the dollar is the most liquid currency, which makes it valuable during heavy equity sell-off and major risk-off moves. The SP500 index deepened into bearish territory, declining below 3750 points, the yield of 10-year bonds reached 3.4%, gold briefly strengthened to $1875 after release of US CPI data for May, however since yesterday it has erased almost 3.5% falling to $1820:

The fact that gold did not work as a safe haven asset during the sell-off tells us about two things. First, fears of stagflation in the US appear to be still low. Secondly, bullish momentum in gold arises when opportunities to search for yield are greatly reduced or when uncertainty (the risks that can’t be measured) increases, hence neither of these concerns are gaining traction.

Today, futures for US equity induces trade in green, indicating high chance of a relief rally during today NY session. The US producer price report helped equity sentiment to stabilize, indicating a slight slowdown in producer price inflation relative to forecast, which was a welcomed sign in the current rough global inflation picture:

Based on money market expectations, the rate hike by 50 bp tomorrow is likely to elicit strong bullish response in equities that will last for some time. A 75 bp move is priced in by the market, so in the event of such an outcome, the markets will focus on dot plot and QT comments. 100bp shock rate hike unlikely, but in the event of such an outcome, it is quite possible to see the S&P 500 move towards 3700 and even lower.

Disclaimer: The material provided is for information purposes only and should not be considered as investment advice. The views, information, or opinions expressed in the text belong solely to the author, and not to the author’s employer, organization, committee or other group or individual or company.
High Risk Warning: CFDs are complex instruments and come with a high risk of losing money rapidly due to leverage. 75% and 72% of retail investor accounts lose money when trading CFDs with Tickmill UK Ltd and Tickmill Europe Ltd respectively. You should consider whether you understand how CFDs work and whether you can afford to take the high risk of losing your money.