North American News
Fear dominates financial markets
Risk aversion took over financial markets at the beginning of the week. Global stocks edged lower, while government bond yields soared during European trading hours, giving up some ground ahead of Wall Street’s close.
The dismal mood came from the usual suspects. High inflation levels, increasing coronavirus cases, and tensions in Eastern Europe all contributed to the run to safety.
The American dollar ended the day mixed but generally stronger. The worst performers were commodity-linked currencies, as gold and oil prices were sharply down. The AUD/USD pair fell to a fresh multi-year low of 0.6974, while USD/CAD approaches 1.3000, trading at levels last seen in December 2020. Meanwhile, spot gold trades around $1,854 a troy ounce while WTI settled at $102.70 a barrel.
The EUR/USD pair fell to 1.0494 but managed to trim losses, ending the day with modest gains in the 1.0560 price zone.
GBP/USD is unchanged at 1.2340. Bank of England external Monetary Policy Committee member Michael Saunders said a neutral rate might be in the 1.25%-2.5% range, adding that UK rates might need to go above neutral if inflation expectations go higher.
In the US, Federal Reserve member Raphael Bostic said that a 75 bps rate hike has a low probability, but added that he is not taking anything off the table. Anyway, he said that he sees two or three 50 bps rate hikes as a baseline.
Across the Pond, European Commission President Ursula von der Leyen noted that they keep making progress on a Russian oil embargo but still need to secure energy resources for the region.
US April wholesale inventories +2.3% vs +2.3% expected
- US wholesale sales and inventory data
- Prelim was +2.3%
- Prior was +2.6%
- Sales +1.7% vs +1.7% prelim
Commodities
Gold Price Forecast: XAU/USD bears moving in on last week’s low, large selling program could be underway
- Gold is under pressure at the start of the week, heading towards last week’s low with 200 DMA eyed.
- The US dollar made a fresh 20-year high at the start of the week in a risk-off setting.
- The Fed, Ukraine and China COVID crisis is weighing on risk sentiment.
The price of gold remain in the hands of the bears as the US dollar surged to print a new 20-year high at the start of the week. At $1,857, XAU/USD is lower by some 1.38% at the time of writing. The US dollar is off the highs for the day, as per DXY 104.187, but is finding some support in mid-day New York trade, currently climbing from the 103.392 lows and back to being flat for the day so far.
The nuts and bolts of the market sentiment stem from the risks associated with China’s COVID crisis, the Ukraine crisis, supply chain risks and what this all now means for commodity prices and the central bank reaction function in global monetary policy.
Markets are anticipating a series of interest rate hikes from the US Federal Reserve and a global economic growth slowdown which has been supporting the US dollar. The dollar has risen for five straight weeks as US Treasury yields have climbed on expectations the Fed will be aggressive in attempting to tamp down inflation with no Fed pivot in sight which is a negative risk for the medium term.
The Fed last week raised rates by 50 basis points as it seeks to lower inflation without tilting the economy into a recession. 75 bps expectations were dialled down by the Fed chairman, Jerome Powell, which initially hurt the greenback. However, the market pivoted the very next day and the greenback soared to what was at the time, a fresh 20-year high in anticipation of a solid labour market report.
Indeed, on Friday, a solid jobs report cemented expectations for more rate hikes although due to lower wage inflation vs expectations, the prospect of 75bps rate hikes remains off the table. With that being said, the US inflation data will now be the next key data event.
”Core prices likely stayed strong in April, regaining momentum to 0.5% MoM after recording 0.3% in March,” analysts at TD Securities said. ”While used vehicles prices likely declined again, they probably fell less sharply than in the last report. We also look for renewed strength in shelter inflation. Our MoM forecasts imply 8.1%/6.1% YoY for total/core prices, likely confirming March was the peak of the cycle.”
Yields on most US Treasury notes have actually pared early gains to trade lower on Monday after the benchmark 10-year yield hit fresh 3-1/2-year highs as inflation fears continue to weigh on risk sentiment. The S&P 500 index down more than 2.7% as growth stocks were again pulled lower by climbing Treasury yields also.
Nevertheless, there is an exodus in gold taking shape and analysts at TD Securities argue that ”gold prices need only close below $1,875/oz to catalyze a substantial selling program that could send the yellow metal below the psychologically important 200dma range.”
Gold technical analysis
As per the pre-open analysis, Gold, Chart of the Week: Bears eye a break of critical $1,875, the level has been well and truly compromised and the bears are moving in on last week’s low of $1,850.
Oil has been remarkably resilient, but not today
- Economic anxiety is growing
The last few weeks in oil have been incredible.
Despite China lockdowns, risk aversion and global growth worries, it has been remarkably resilient. On Friday, it closed at a six week high in what looked like it could be the break of a pennant.
Today, it’s a different story. Ultimately, oil depends on a healthy global demand backdrop and the ongoing rout in equities isn’t painting that kind of picture.
With that, crude is now back to $105.35 from a high of $111.15 on Friday.
That messes up what had been a nice looking technical trade. As (almost) always, when the chart is too perfect, it doesn’t work. Now there’s the potential for a false breakout reversal. Or we continue to chop along in the $95-$115 range. In the latter case, I take that as a win for the bulls. Anything about $95 in this environment highlights supply shortages.
EU News
European equity close: The lowest since the March lows
- At least there aren’t may tech stocks in Europe
European stock indexes closed near the lows of the day in relentless selling that picked up after the US open.
- UK FTSE 100 -2.0%
- German DAX -2.3%
- Italy MIB -2.3%
- Spain IBEX -1.8%
- French CAC -2.3%
- Stoxx 600 -2.5%
Other News
EU’s Von Der Leyen: We made progress in meeting with Hungary but further work needed
- That doesn’t sound promising
- Discussion with Orban was ‘helpful to clarify issues related to sanctions and energy security’
- We made progress but further work is needed
Multiple reports have done the rounds saying an EU deal to ban Russian oil is still coming but it’s getting harder to believe with every passing day. Perhaps the oil market finally got the message today?
WTI crude oil is down $6.75 to $103.06.
Cryptocurrency
Levels to watch as bitcoin falls to the lows of the year
Perhaps what worries me most about broad markets are Tesla and bitcoin.
I’d argue that these two, not FAANG, are the real generals of the tech bull market in the last 7-8 years. We’ve seen the pandemic stocks come undone and the Nasdaq is down 23% but the charts in both Tesla and bitcoin are now strained.
For bitcoin, we’ve now broken the January low and confirmed the false breakout in late March. That opens up a world of downside with $30,000 and the 2021 lows near $28,800 as key support levels.
Given where sentiment is, I can see it crumbling down to 20,000 is a true rout. In assets without defined earnings, there’s really no bottom and now way to justify a particular level. So it’s a sentiment trade.
Ultimately, I think the US consumer is in good shape and that China will eventually exit covid controls. But it’s tough to fight the tape until we get a clear view on the Fed’s terminal level. Along those lines, this week’s CPI report will be big.