May 2022

MARKET Given that the Fed pivot is the most clearly communicated rate hike cycle in modern history and will continue to be so, stocks moved higher as the market now seems convinced there will be few double paced rate hike twists in the future. That should lift some worries for equity investors about impending policy mistakes. Investors seem ok with what is currently priced, which is a very flat FED FUNDS futures at an implied 2.50-2.75% for the Fed far into the future. The FOMC minutes were a bit outdated anyway. Fed members have been pretty clear in their comments around 50bp hikes recently, while some have even softened the hawkish tone. So, equity traders quickly looked past the release moving from catch-down camp to short covering mode lifting stocks higher. But the S&P 500 benchmark remains well entrenched within the 3800-4100 range trade as investors stay in wait and see mode.  At 3800, the market is pricing a fair amount of P/E de-rating plus earnings risk. At the same time, ongoing headwinds from central bank tightening, the Ukraine conflict and the China lockdown should prevent any meaningful rally beyond 4100. Next up is US preliminary GDP, which is expected… Read More »Post FOMC: Market shift from catch-down camp to short covering mode

EUR/USD – 1.0728 Although euro's rally above 1.0697 (Mon) to a 1-month peak at 1.0748 in New York after hawkish comments from ECB's Lagarde suggests upmove from May's 5-year bottom at 1.0350 would extend marginally, reckon 1.0770/75 would remain intact and yield prospect of another fall due to loss of momentum. On the downside, daily close below 1.0697 would indicate a temporary top is in place and yield weakness towards 1.0662, break, 1.0608/10 later. Data to be released on Wednesday Australia construction work done, New Zealand RBNZ interest rate decision, Japan coincident index, leading indicator. Germany GDP, Gfk consumer confidence, France consumer confidence, Swiss investor sentiment, U.S. mortgage application, durable goods, durables ex-transport and durables ex-defense.

FOMC will release the minutes of the May policy meeting on Wednesday, May 25. Markets have already priced in two more 50 bps Fed rate hikes. Investors will pay close attention to discussions around the Fed's balance sheet reduction plan. The greenback is having a hard time preserving its strength toward the end of May and the US Dollar Index (DXY) remains on track to post monthly losses for the first time in 2022. Following the US Federal Reserve’s decision to hike its policy rate by 50 basis points (bps) earlier in the month, policymakers have been voicing their willingness to raise the policy rate by a total of another 100 bps in the next two meetings. Two more 50 bps Fed rate hikes a done deal  Markets seem to have already priced in those expectations with the CME Group FedWatch Tool pointing to a more-than-80% probability of the Fed hiking by 50 bps in June and July. Hence, the dollar is struggling to find demand as investors see the US central bank adopting a cautious stance moving forward. Renewed optimism about the annual Consumer Price Index (CPI) having peaked at 8.3% in April and the hawkish tilt in other… Read More »FOMC May Minutes Preview: Will the Fed have to sell MBS?

The Reserve Bank of New Zealand is set to hike OCR by 50 bps to 2% in May. The pace of future tightening will hold the key amid global recession risks. The kiwi needs more than a 50 bps hike to extend the ongoing recovery. Another double-dose rate hike is on the table from the Reserve Bank of New Zealand (RBNZ) when it meets this Wednesday to decide on its monetary policy at 0200 GMT. The central bank’s outlook on the pace of tightening, however, will be key in determining NZD/USD’s next price direction. RBNZ: A 50 bps hike already baked in A 50 bps hike to the Official Cash Rate (OCR) from 1.50% to 2% on Wednesday is well priced in by the market. The RBNZ will raise the key rate for the fourth consecutive time since last October, accounting for two back-to-back double-dose lift-offs. With the half percentage point rate hike coming this time, the central bank will become the first major central bank to achieve a neutral stance for the first time since 2015. The policy announcement will be followed by Governor Adrian Orr’s press conference at 0300 GMT. 20 out of the 21 economists surveyed by… Read More »Reserve Bank of New Zealand Preview: Will they step up their tightening game?

Hawkish comments by ECB policymakers lifted EUR/USD to a fresh monthly peak on Monday. The emergence of some USD buying on Tuesday kept a lid on any further gains for the major. Recession fears, aggressive Fed rate hike bets helped revive demand for the safe-haven buck. The EUR/USD pair witnessed an aggressive short-covering move on Monday and rallied to a fresh monthly peak in reaction to hawkish comments by the European Central Bank (ECB) policymakers. In fact, ECB President Christina Lagarde said in a blog post that the central bank was likely to lift the euro area deposit rate out of the negative territory by the end of September. She added that the ECB could raise interest rates further if it saw inflation stabilizing at 2%. Separately, ECB Governing Council member Francois Villeroy de Galhau noted that the deal is probably done because there is a growing consensus on a July rate hike. Apart from this, broad-based US dollar weakness was seen as another factor that contributed to the pair's strong move up. Given that a 50 bps Fed rate hike move is already priced in, the risk-on impulse weighed heavily on the safe-haven buck. Hopes that loosening of COVID-19… Read More »EUR/USD Outlook: Poised to test 1.0775 confluence hurdle after Lagarde’s hawkish comments

Key highlights EUR/USD started an upside correction above 1.0500. It broke a key bearish trend line with resistance near 1.0490 on the 4-hours chart. EUR/USD technical analysis Looking at the 4-hours chart, the pair formed a base above 1.0350 and recovered higher. There was a clear move above a key bearish trend line with resistance near 1.0490. The pair surpassed the 1.0520 resistance zone and the 100 simple moving average (red, 4-hours). It even climbed above the 50% Fib retracement level of the key decline from the 1.0641 swing high to 1.0349 low. On the upside, the pair is now facing resistance near the 1.0650 level and the 200 simple moving average (green, 4-hours). The next major resistance is near the 1.0720. A clear move above the 1.0720 level might push the pair towards the key 1.0800 resistance zone. If not, there is a risk of another decline below the 1.0500 level. The next key support is near 1.0450. A clear move below the 1.0450 level could stage a strong decline in the near term.

Get our view why the end of the bear market may not be in sight, but the US -led stock market sell off could slow down. Does technical analysis even matter anymore? For the last 20 plus years, we could, with a bit of luck and central bank support, predict where markets would fall to on any given sell off. Take the financial crisis, or the global pandemic, when these major events pulled the rug out underneath global stock market bulls, the market tended to sell off quickly before being calmed down by an influx of multilateral central bank support led by the Federal Reserve. But the last two months have been epoch-shifting. Firstly, stocks and bonds have fallen side by side, the first time that they have done this in decades and US and global markets are in the midst of their longest sell off in years. The S&P 500 is down 19%, just above bear market territory, while big tech has fared worse, the Nasdaq is down more than 25% so far in 2022. Bonds have also taken a battering, the benchmark 10-year Treasury yield has fallen slightly, however, it remains at 2.78%, to put that move in… Read More »The Week Ahead: The end of the bear market seems elusive

S&P 500 recovers to the close as option expiry boosts stocks. S&P 500 is now though officially in a bear market.  Nasdaq closes in the red while Dow Jones Index is flat. Another wild and volatile week which seems to be the tone so far for 2022. Wild swings throughout the week were mirrored on Friday with wild intraday swings. The S&P 500 did manage to slide into a bear market territory on Friday. While there is no real official designation for a bear market the generally accepted consensus is that it's 20% from peak. The Nasdaq long ago meet this criterion but the S&P 500 has been flirting all week with the level. The job nearly looked to be done on Wednesday after Target (TGT) sounded alarm bells with its margin pressures and lowered guidance. Friday got the job done but with options expiry, in the afternoon the anticipated flows were always likely to see a late-session rally.  Next week sees more retailers lined up to report earnings and after Target and Walmart the bar has been set pretty low. This could set up a counter-rally with any sort of relief on earnings and or outlook likely to see… Read More »Week Ahead on Wall Street: Options expiry to the rescue on Friday but its official, we are in a bear market

The converging forces of price inflation and economic contraction continue to weigh on asset markets.  The Dow Jones Industrials got clobbered by 1,000 points on Wednesday and is headed for its eighth weekly loss in a row. Meanwhile, precious metals markets are finally finding some footing. After declining for four straight weeks, gold and silver is advancing in this week’s trading.   Markets are experiencing big swings as new recession warnings are flashing. Big box retailers reported disappointing sales numbers this week while major investment banks downgraded their economic outlooks.  Analysts at Bank of America, Morgan Stanley, and Wells Fargo are warning of a looming recession and possible stock market crash.  Here’s commentary from financial advisor Steven Van Metre: Steven Van Metre: First it was Bank of America calling for a crash, now it's Morgan Stanley. Let's check this out. Well, Morgan Stanley warns ingredients for a global recession are on the table, and markets need to confront the possibility of an economic downturn. With inflation at the highest level in 40 years, the Federal Reserve taking increasingly aggressive action to cool consumer demand and prices, the risk of a global recession is on the rise, according to Morgan Stanley's… Read More »Big banks call for recession and possible stock market crash

China’s overnight rate cut boosted sentiment, but investors remain nervous about diving back in to stocks after this week’s volatility. Stocks attempt to recover in final session “It has been another see-saw week in markets, as a rally in the first part of the week turned to dust in the second, but China’s rate cut has provided the rationale for a bounce in global stocks to round off the week. Although very much a lone voice crying in the wilderness, the PBoC’s move provided the fundamental basis for a rally in risk assets, reversing some of the mid-week gloom. But the surge in German factory-gate prices and a slump in UK consumer confidence shows that the broader backdrop continues to be quite negative for equities. With US markets already shedding initial gains, the picture remains uncertain.” Investor sentiment remains weak “Rally or not, investors are not exactly flooding back into equities. Instead, this will be a short-term bounce that may will use to get out at a better price. And given how quickly the bounce earlier in the week fizzled out, it is likely that caution is set to persist. Next week’s Fed minutes will remind markets that there is… Read More »European stocks bounce but Wall Street struggles