May 2022

At the end of another choppy week for European markets sentiment appears to have become much more fragile, with the moves being seen in bond yields reflecting concern that we are heading for a growth slowdown. Yesterday’s price action saw a sea of red for markets in Europe with the most pain being felt by the retail sector after this week’s profit warnings from US retail giants Walmart, Target and Kohl’s. US markets have also seen some heavy selling this week, with both the S&P500 and Nasdaq 100 managing to hold above their lows from last week of 3,858 and 11,692, while still finishing the day lower for the second day in succession. Asia markets, on the other hand have seen a strong rebound this morning after China cut its 5-year loan prime rate by 15 basis points, for the second time this year. Consequently, European markets look set to open higher this morning at the end of yet another rollercoaster week for investors. The one silver lining from the selling of the past two days was that we managed to close well off from last week’s lows, suggesting a general reluctance to become too bearish too quickly. That said… Read More »UK Retail Sales set to decline for the 3rd month in a row

Outlook: Today we get the usual weekly jobless claims. April existing home sales, the Philly Fed, and for the policy wonks, the ECB policy meeting minutes from the April meeting. The elephant in the room is the S&P down over 4% in the worst rout since June 2020, just when everyone got the message the Covid pandemic was a Big Deal and worthy of the panic that had started a few months before. Ironically, in 2020 the Q1 GDP was down 9.1% and Q2, not yet released when the S&P tanked that time, was a whole lot less bad at -2.9%. The implication is that markets are awfully slow to recognize a serious problem, but that flies in the face of the old attribution of the S&P being a leading indicator of economic health. We say the hysteria yesterday was unwarranted and that will be seen when facts get unspooled. The problem with hysterical panic is that it spreads like wildfire and disregards offsetting information. This is the classic behavior of crowds.  Reuters has a headline “Which earnings to the rescue?” but then the story goes nowhere and doesn’t name anything. So how does a bear market get halted? One… Read More »Markets are awfully slow to recognize a serious problem

EUR/USD – 1.0479 Euro's selloff from 1.0563 to 1.0461 in New York yesterday on renewed safe-haven usd's buying due to fall in U.S. yields and U.S. stocks suggests recent corrective upmove from last Friday's fresh 5-year bottom at 1.0350 has ended there and below 1.0438/42 would yield further weakness to 1.0390/00 later. On the upside, only a daily close above 1.0495/00 may risk stronger recovery to 1.0530/40. Data to be released on Thursday: Japan machinery orders, exports, imports, trade balance, Australia employment change, unemployment rate. EU current account, construction orders. U.S. initial jobless claims, continuing jobless claims, Philly Fed manufacturing index, existing home sales, leading index, Canada new housing price index and producer prices.

Shanghai's “freedom day” and JP Morgan's optimism have sparked a relief rally, adverse for the dollar. US data and tough Fed talk on inflation could trigger fresh demand for the greenback. EUR/USD seems especially vulnerable to a shift in the mood.  EUR/USD and other short-term assets are short-term bullish, then bearish. My colleague Tomàs Salles will tackle the technical patterns emerging, and I will focus on the fundamentals.  *Note: This content first appeared as an answer to a Premium user. Sign up and get unfettered access to our analysts and exclusive content. Reasons for the recovery First, China announced that the six-week lockdown in Shanghai will end after the city reported three consecutive days without community infections. The city is the country's largest and the most important one economically. A significant chunk of the recent market gloom came from the downturn in Chinese consumption – and production – due to lockdowns. Any easing is risk-on, adverse for the dollar. The news is different from that on Monday – weak Chinese figures.  The second positive note is also a positive one contradicting a negative one. On Monday, the financial media discussed Lloyd Blankfein's comments that a US recession is a “very high… Read More »Dollar weakness stands on two vulnerable legs, Fed fear set to trigger greenback comeback

Markets US equities fell sharply Wednesday, S&P down 4%, the most significant daily decline since June 2020. The weakness came as Target's quarterly earnings added fuel to the recession risk narrative, while the drop of US10 year yields down 10bps to 2.88% offered little support. And Oil settled at 2.3% lower on the day. Equities continue to be at the mercy of broader macro themes, with more hawkish comments from Fed Chair Jay Powell leading to a further move higher in front-end rates, which continues to prove problematic for risk. Medium-term, the Fed is likely to respond to any easing in financial conditions by ratcheting up the hawkish noises and, in effect, acting as a lid on the markets. And this should keep active money on the sidelines. The relief rally trap door sprung when the S& P 500 4000 pins snapped after Target's earnings results exacerbated some recession fears that continued the theme of rising inventories detailed by Walmart on Tuesday. And the broad-based sell-off absolutely hammered tech. Indeed, contagion from bellwether consumer earnings prints is sending stagflationary shockwaves through the market, and equities suffered another massive bout of indigestion after yesterday's Alka Seltzer moment. While rising inventories and higher… Read More »Stocks sink in a vicious sea of red, gold in no man’s land

Australian wage growth stood at 2.4% YoY in the first quarter of the year. The unemployment rate is expected to have decreased to 3.9% in April from 4%. AUD/USD is trading between Fibonacci levels and is poised to resume its slump. Australia is set to report its April employment figures on Thursday, May 19. The country is expected to have added 30K positions in the month, while the unemployment rate is foreseen down to 3.9% from the current 4%. But could these numbers be enough to boost the aussie? The Reserve Bank of Australia has hiked the cash rate by 25 bps earlier this month, the first movement in over a decade. The decision was previously conditional on inflation but also on wage growth. The Minutes of the meeting released earlier in the week showed the Board noted that information on “wages over the preceding month had been consistent with more persistent inflationary pressures arising from limited spare capacity in the domestic economy.”   Disappointing wage growth Policymakers linked rate hikes to actual inflation remaining sustainably within the 2 to 3 per cent target range, and this was likely to require a faster rate of wages growth than had been experienced… Read More »Australian Employment Preview: Could strong figures aid the aussie?

Europe Having seen some strong gains yesterday, we’ve slipped back on the back of a loss of momentum after Fed chair Jay Powell’s comments last night that the Federal Reserve is determined to regain the initiative when it comes to reining in inflation. A record high for UK inflation hasn’t helped the mood with retailers suffering the worst effects of a 9% CPI print, with Ocado, JD Sports, Tesco and B&M European Retail all slipping back. The energy sector is helping to underpin the London market, with BP and Shell outperforming. Rolls-Royce shares have come back into favour suddenly, having slipped to 18-month lows earlier this month, the shares have risen back to their highest levels this month.   Commercial real estate British Land has seen its shares rise after reporting a significant improvement in its portfolio valuation and performance, as the return to the office gathers pace, and consumers get out and shop more. Occupancy rates rose to 96.5% from 94.1% Underlying profits rose to £251m. Fresh from returning £3.5bn to shareholders earlier this week, Aviva shares have edged higher after reporting a decent Q1 update. UK and Ireland sales rose 2%, to £8.4bn, with general insurance sales rising… Read More »Stocks roll over again as inflation starts to show signs of biting

Uncertainty about peak inflation in the US continues to support the dollar.  Beijing's zero covid policies add to the greenback's safe-haven appeal. Russia's ongoing war in Ukraine gives sterling an advantage over the euro. That advantage is undermined by relative certainty about the BOE's policies, differing from the ECB's.  EUR/USD and GBP/USD are set to extend their declines – and for good reasons. Where is the bottom? The low point for these currency pairs heavily depends on the Federal Reserve and the main question is: when will the dollar reach a top? *Note: This content first appeared as an answer to a Premium user. Sign up and get unfettered access to our analysts and exclusive content. US inflation has yet to peak The top is peak inflation, or better said: core inflation. Once prices of everything excluding volatile food and energy begin stabilizing, the high point in the Fed's tightening cycle would be seen. Currently, the greenback benefits from high uncertainty, which is compounded by other issues (see later).  The Core Consumer Price Index (Core CPI) read came out at 0.6% MoM in April, which is over 7% in annualized terms. The Fed's target is 2%. On a yearly basis, prices… Read More »Where is the bottom for EUR/USD and GBP/USD? Four factors traders need to consider

European stocks got off to a mixed start to the week yesterday, after a big decline in Chinese retail sales pointed to an economy that came to a crashing halt in April, as a result of widespread covid lockdowns and restrictions.   US markets also underwent a similarly mixed session, with another significant decline in the Nasdaq 100, while the Dow finished slightly higher. Investor concerns about a possible recession are contributing to a short-term bid in US treasuries, pulling yields down in the process, as well as a reluctance to build on the rebound seen at the end of last week. Against that backdrop today’s European open still looks to be a positive one, after Asia markets pushed higher on optimism over the easing of some covid restrictions in Hong Kong and Shanghai, as we look ahead to a day of significant economic data from the UK and US. It’s a big week for the UK economy starting with wages data today, CPI inflation for April tomorrow which is expected to hit a record high of 9.1%, and April retail sales on Friday that are likely to slow sharply, as a result of surging inflation. Earlier this month the… Read More »UK wages and US Retail Sales in focus

While US markets underwent their 6th successive weekly decline, markets in Europe managed to claw their way back into positive territory, helped in some part perhaps by the strength of the US dollar which pushed both the euro and the pound to their lowest levels since 2017 and 2020, respectively. US markets also appear more vulnerable given that of all three central banks, the Federal Reserve appears the more determined of all the others in driving inflation lower, with a strong US dollar helping it to achieve that very goal. It is true that pressure is increasing on the European Central Bank to raise rates by the summer, but anyone who thinks they will be able to raise them much above zero is probably deluding themselves. Even the Bank of England is facing a tricky balancing act when it comes to whether to impose further rate rises on a UK economy that appears to have ground to a halt. At the weekend, the UK central bank came under a fire of criticism from Conservative politicians on the Treasury Select Committee criticising it for being too slow to react to the sharp rise in inflationary pressures. It is certainly true that the… Read More »Europe set for weaker start after China data disappoints