May 2022

UK stocks and the British pound rose on Friday after the surprisingly positive economic data from the country. According to the Office of National Statistics, the country’s retail sales rose by 1.4% in April after falling by 1.2% in the previous month. This increase led to a year-on-year decline of 4.9%, which was better than the median estimate of -7.2%. Excluding the volatile food and energy products, sales rose by 1.4%. Other numbers published this week showed that the country’s economy was doing well as the unemployment rate fell to the lowest level in decades. The Japanese yen retreated slightly against the US dollar after the relatively strong inflation data from Japan. The numbers revealed that the closely watched core inflation rose at the fastest pace in seven years. The figure rose to 2.1%, which was in line with what analysts were expecting. The weaker yen contributed to this inflation. Still, these numbers are significantly lower than in other countries. For example, in the US and UK, core inflation stands at over 6%. Therefore, with inflation above the BOJ target of 2%, there is a possibility that the BOJ will start tightening.  Global stocks were in the green on Friday… Read More »Global stocks bounce back after China’s new stimulus

Energy The oil market has seen a partial recovery in early morning trading today, after Brent settled more than 2% lower yesterday. Reports that the US is looking to ease some sanctions against Venezuela contributed to yesterday’s weakness, with it thought that the easing could see a partial resumption of Venezuelan oil to Europe. Any increase is likely to be rather limited, at least in the short term. There are growing concerns over the refined products market. What started out as a tight middle distillate market appears to be spreading into the gasoline market, at least for the US. At a time when US gasoline inventories should be building ahead of the driving season, inventories instead have declined for most of this year. These are now below the low end of the 5-year range. Gasoline demand should only increase over the coming months and, in the absence of a pick up in refinery runs, the gasoline market is likely to continue to tighten. The tighter gasoline market appears to have also contributed to a narrowing in the WTI/Brent discount, given the need for higher US refinery runs, which should be supportive for US crude demand. Gasoline stocks in the ARA… Read More »The commodities feed: US gasoline tightness

Economic releases this week point to widely different growth momentum in the global economy. Chinese activity data for April were much weaker than expected with retail sales dropping 11.1% y/y and industrial production down 2.9% y/y. The weak batch of data points to a negative q/q growth rate in GDP in Q2 and also suggests downside risk to our 4.7% growth estimate for this year. The government’s 5.5% target will require a significant amount of stimulus, which China does not look prepared to provide. The credit impulse was slightly weaker in April, pointing to moderate stimulus. A key driver of the weak Chinese data has been the outbreak of Covid-19 and the lockdowns by the Chinese authorities implemented to maintain their zero-Covid policy. While Shanghai is improving challenges persist in other cities such as Beijing and surrounding areas. The continued outbreaks highlight the difficulty in keeping Omicron contained and warns of more future lockdowns and supply chain disruptions. On a more positive note, US data released this week showed quite resilient private consumption and industrial production despite geopolitical uncertainty and rising inflation. US retail sales data grew quite strongly in April both in nominal and real terms (taking into account… Read More »COVID-19 lockdowns hit the Chinese economy

EUR/USD The Euro is standing at the back foot on Friday, following 1.2% advance on Thursday, but dips were so far limited, adding to positive signal from Thursday’s bullish engulfing pattern. Fresh bullish momentum on daily chart and formation of 5/10DMA bull-cross, underpin the action for potential stronger short squeeze. Bulls need repeated close above 1.30532/45 (20DMA/Fibo 23.6% of 1.1184/1.0349) to confirm bullish stance and keep in play hopes for stronger correction. Extended recovery will need an extension through 1.0641/43 (May 5 lower top / daily Kijun-sen) and 1.0668 (Fibo 38.2% of 1.1184/1.0349) to generate initial reversal signal. Positive scenario is supported by formation of bullish engulfing pattern on weekly chart and RSI/stochastic indicators emerging from oversold territory. Also, formation of long-legged Doji on monthly chart suggests that larger downtrend might be running out of steam. However, caution is required as geopolitical and economic news remain in play as key risk sentiment drivers and may influence the performance of the pair at any time. Res: 1.0607; 1.0641; 1.0668; 1.0700. Sup: 1.0531; 1.0496; 1.0459; 1.0388. Interested in EUR/USD technicals? Check out the key levels

Risk appetite continued to recover on Thursday, with the US dollar once again giving back some of its recent advances against most major and emerging market currencies. Since the end of last week, the US Dollar Index has fallen by almost 2%. EUR/USD has rebounded back towards the 1.06 level, helped on its way by some hawkish comments from ECB members and heightened expectations that the bank will raise rates by 25 basis points at its July meeting. Sterling has edged back to just shy of the 1.25 mark, while all other G10 currencies have also posted gains against the greenback in the past week. While there has not necessarily been an obvious single catalyst for the rally, we largely attribute the move lower in the dollar to the below: 1) Market takes a breather As tends to be case following a prolonged rally, we may simply be seeing investors unwinding their long positions, and booking profits following the recent sharp move higher in the dollar. 2) China’s COVID-19 headlines improving Macroeconomic data out of China has taken a serious turn for the worst in the past few weeks, but headlines on the covid front have, at least, shown signs… Read More »What has driven the sell-off in the US dollar this week?

Risk sentiment is wavering as investors are constantly evaluating the likelihood of a recession. The flash PMIs for May might help guide those expectations in the coming week. In the US, there will be plenty of additional drivers for the dollar, such as the FOMC minutes and the PCE inflation readings. Markets remain fixated on seeing peak inflation so any trace of this might help calm nerves. In the world of central banks, the Reserve Bank of New Zealand is expected to hike interest rates again.

Fed minutes – 25/05 – as expected, the Federal Reserve raised rates by 50bps pushing the upper bound of the funds rate to 1%. There had been talk that some on the committee were keen on a 75bps move, however these concerns came to nought with all on the FOMC agreeing to a 50bps hike. The central bank also laid out the start of the balance sheet reduction program starting with $47.5bn in June, rising to $95bn a month after 3 months. This could be construed as being on the dovish side, given that they were starting the program from a lowish base and then ramping up, rather than going for $95bn straight out of the gate. Fed chair Jay Powell also said that based on current data, that the Fed had no intention of going faster than 50bps in a single month, firmly burying any prospect that the Fed would be much more aggressive in subsequent months. He specifically made the point that a 75bps hike wasn’t something the FOMC was actively considering, although in subsequent comments he’s being careful not to rule it out entirely. The discussion over balance sheet reduction is likely to be the more interesting… Read More »The Week Ahead: Fed minutes, US Q1 GDP, Marks & Spencer, Kingfisher, Zoom and Nvidia results

Producer inflation continues to accelerate as it reached a 33.5% y/y in April, setting another record for the indicator. Prices added 2.8% last month after jumping 4.9% during March, continuing to gain strength. Germany is said to have the most substantial fear of inflation of any European country, which is eating into German savings. However, the Bundesbank cannot act alone in tightening policy but can only form a hawkish coalition by bringing the moment of policy tightening closer. And we see some movement in that direction. Increasingly the consensus of the ECB officials is tilting towards a rate hike of 25 points in July. Furthermore, policymakers have not ruled out a further rate increase by 50 points. Whilst this ECB stance is softer than that of the Fed and Euro-region inflation is not inferior to that of the USA. There remains a medium-term pressure factor on the Euro against the Dollar. In the short term, however, the Euro is gathering strength after an oversold year of EURUSD declines with brief stoppages. A rebound in the movement of the last 12 months could correct the EURUSD towards 1.1080, Fibonacci’s 61.8% retracement. However, at 1.08, it might hit the resistance near the… Read More »German inflation awakens European hawks by helping the Euro

Summary United States: April Economic Data Show Resilient U.S. Economy U.S. retail sales topped expectations in April, while industrial production also grew more rapidly than economists expected. Data on housing starts, home sales and homebuilder sentiment, however, showed tentative signs of cooling. Next week: New Home Sales (Tue), Durable Goods (Wed), Personal Income & Spending (Fri) International: U.K. and Canada Inflation Reach New Cycle Highs U.K. inflation surged to a fresh 40-year high in April, quickening to 9.0% and placing additional pressure on the Bank of England (BoE) to double down and tighten monetary policy. Inflation in Canada also reached a new high, but this time of “only” 30 years; headline CPI inched up to 6.8% year-over-year in April. Next week: Eurozone PMIs (Tue), U.K. PMIs (Tue), RBNZ Rate Decision (Wed) Interest Rate Watch: Bond Yields Up Significantly in Many Foreign Economies The United States is not the only major economy in which long-term interest rates have risen significantly. For example, the yield on the two-year government bond in Germany has risen about 100 bps since the beginning of the year, while the comparable yield in the United Kingdom is up about 80 bps over the same period. Topic of… Read More »Weekly economic and financial commentary

Equity markets are back in positive territory on Friday but I'm struggling to get too excited by the moves we see going into the weekend. The rebound may partly reflect the scale of the declines we've seen in the previous couple of sessions, while the cut to the five-year loan prime rate in China may also be giving global markets a bit of a lift. But ultimately, very little has changed and I expect that will continue to hold these markets back. The rate cut announced by the PBOC is obviously good news and is clearly targeted a revitalizing the ailing property market which continues to suffer due to the crackdown last year and Covid lockdowns this. Along with other measures already announced, this could help to revive a hugely important part of the economy. Whether it's enough to help China hit its 5.5% growth target this year is another thing. I imagine we may see further stimulus efforts this year in order to try and get close to that as the country is facing numerous headwinds, as every other is around the world right now. What it has that others lack though is room to manoeuvre on both the… Read More »Recovering into the weekend