North American News
S&P 500 reclaims 3900 but remains negative, and the Dow Jones drops more than 150 points on risk aversion
- The S&P 500, the Dow Jones, and the Nasdaq recorded losses amidst a risk-aversion environment.
- Nothing would stop the Fed from hiking as Kansas City Fed’s George said that the rough markets wouldn’t alter the rate hike plan.
- The US Dollar Index is falling more than 1.50%, dragged down by falling US Treasury yields; gold rallied.
US equities recovered some ground during the day but remain set to finish with losses, despite investors’ efforts of a last-hour rally. At the time of writing, the S&P 500, the Dow Jones Industrial, and the heavy-tech Nasdaq Composite record losses between 0.13% and 0.70% and sits at 3,904.92, 11,398.96 and 31,268.98, respectively.
Sentiment remains dismal, emphasized by the stagflation scenario surrounding the global economy. China’s coronavirus crisis continues as local outbreaks increase concerns of additional lockdowns. Also, high inflationary pressures have taken their toll on big US retailers, such as Walmart and Target, which expressed that their margins shrank due to elevated prices.
Fed officials have crossed the wires in the last couple of days, and most of them have expressed that inflation is “too high” and reiterated the posture of increasing the Federal Fund Rates (FFR) by 50-bps at the June meeting. The Kansas City Fed President Esther George said that a “rough week in the equity markets” would not change her view of hiking rates, while Philadelphia’s Fed Patrick Harker added that the US economy might have a few quarters of negative growth, but that is not what he is foreseeing.
In the meantime, the greenback is further weakening in the week, more than 1.50%. The US Dollar Index, a gauge of the buck’s value, sits at 102.751, losing 1.11% on Thursday. The US 10-year Treasury yield extended its losses in the day, four basis points down from the open and is currently at 2.850%.
Sector-wise, the gainers are Materials, Consumer Discretionary, and Energy, up 1.23%, 0.84%, and 0.69%, respectively. The worst performers are Consumer Staples, Financials, and Technology, falling 1.74%, 0.54%, and 0.50% each.
In the commodities complex, the US crude oil benchmark, WTI, is gaining 2.70%, trading at $112.00 a barrel, while precious metals like Gold (XAU/USD) is rallying 1.35%, exchanging hands at $1840.88 a troy ounce, helped by a softer US dollar.
Nasdaq index trades above and below its 50% midpoint from the post pandemic low
- The 50% midpoint comes in at 11449.29
The NASDAQ index has been trading up an down today. The high price reached 11562.82. The low price extended to 11313.31. Near the midpoint of that range sits the 50% midpoint of the trading range since the post pandemic low. That midpoint comes in at 11449.29.
The current prices above that level at 11489, above the midpoint level. Tilt is a little to the bullish side.
Nevertheless, the ups and downs today around the midpoint of the long-term range suggests that the traders are trying to figure out what’s next. Is it a time to correct back to the upside away from the 50% level, or does the price head back toward a retest of the lows from last week at 11108.76?
As a guide, the move down from the November 22 high to the low price reached on May 12 took the NASDAQ index down -31.48%.
Going back to the sell off from the pandemic back in March 2020, that selloff from the global economy shut down, subtracted -32.04%. So the moves lower are nearly the same.
Of course inflation may have peaked (at 8.5% ish) but oil prices remain elevated.
Wheat prices this week moved up toward the spike highs seen on March 8, and well off the corrective lows from March 30. The high reached $13.63 on March 8. The low extended to $9.72 on March 30. The current price is at $12.09.
Corn prices are near their highest level going back to September 2012.
Moreover, retailers like a Target said they have been holding back on price increases mainly as a result of higher costs from energy/employment. However, if they and others decide to push prices up, inflation from the goods standpoint may have another leg to the upside.
Needless to say, food inflation, energy inflation and supply chain constraints as a result of China Covid lockdowns has the Federal Reserve concerned about persistently high inflation which could lead to rates moving much higher than the neutral rate of near 2.5%.
If so, where do stocks belong?
Back at the start of the pandemic, growth was expected to slow, but inflation was also expected to move sharply lower as well. Central bank policy and fiscal policy was growth oriented and expansionary. That dynamic is not the case now.
US sells 10-year TIPS +0.232% vs +0.20% WI
- Results of the 10-year inflation-protected bond sale
- Prior was -0.589%
- This is a 9-year 8-month reopening
- Bid to cover 2.24 vs 2.43 prior
Commodities
Gold Price Forecast: XAU/USD is rallying above the 200-DMA and eyes the 20-DMA at around $1860
- The market sentiment remains negative as new China provinces have local outbreaks, so additional lockdowns loom.
- Fed’s George and Evans back 50-bps increases in the next meetings.
- Fed Harker commented that the US might have a few quarters of negative growth.
- Gold Price Forecast (XAU/USD): A daily close above the 200-DMA would shift the bias to neutral and opens the door for an upward move to $1860s.
Gold spot (XAU/USD) is rallying in the North American session, and it is above the 200-day moving average (DMA), which lies at $1838.30, threatening to shift the yellow metal negative bias to neutral as the precious metal takes advantage of lower US Treasury yields and a soft US dollar. At the time of writing, XAU/USD is trading at $1847.68 a troy ounce.
A softer US dollar and weaker US corporate earnings boost Gold’s appeal amidst a dampened sentiment
The factors above-mentioned are a tailwind for Gold. Even though Shanghai is about to reopen after dealing with Covid-19 restrictions for at least a month, other China cities with local flare-ups have increased concerns of further lockdowns. Also, the inflationary scenario started to hit the earnings of big US retailers, which lowered their growth forecasts, despite that Retail Sales, showed the resilience of consumers. That, alongside the possible scenario of stagflation around the US economy, despite Fed’s chief Powell’s confidence that the US economy is strong, boosts the prospects of Gold.
In the meantime, the greenback remains on the backfoot, a tailwind for the bright metal, weighed by falling US Treasury yields. The 10-year benchmark note is losing 7.5-bps, sitting at 2.819%, while the US Dollar Index, a gauge of the buck’s value, is losing almost 1%, retreating towards 102.981.
Meanwhile, the US economic docket has featured the Initial Jobless Claims for the week ending on May 14, which unexpectedly rose to 218K, more than the 200K estimated. Furthermore, the Philadelphia Fed Manufacturing Index rose to 2.6, worse than the 17.6 estimated, aligning with the drop of the New York Empire State index, which contracted to -11.6, starting to paint a dismal US ISM figure for the next release on the first week of June.
Elsewhere, Fed speakers continue to dominate the headlines. Earlier today, Kansas City Fed President Esther George said that the “rough week in the equity markets” does not alter her support of 50-bps hikes to cool inflation. She added, “right now, inflation is too high, and we will need to make a series of rate adjustments to bring that down.”
On Wednesday, Chicago’s Fed President Charles Evans said that the US central bank needs to hike rates above neutral. Evans added that once the neutral rate is reached, “if we go 50 bp beyond that if we go 75 bp beyond that, then that restrictive setting of policy should be working to bring inflation down.” Later on that day, Philadelphia’s Fed President Patrick Harker stated that the Fed “doesn’t want to overdo it” and commented that the US might have a few quarters of negative growth, but that is not what he is forecasting.
Gold Price Forecast (XAU/USD): Technical outlook
XAU/USD is back above a two-year-old resistance trendline and so far reclaimed the 200-DMA at $1838.31. That said, the non-yielding metal bias shifted from negative to neutral. However, a daily close above the previously-mentioned level is needed to cement the bias. Failure to do so would leave the yellow metal vulnerable to further selling pressure.
With that said, the XAU/USD’s first resistance would be May 12 daily high at $1858.67. Break above would expose the 20-DMA at $1863.06, followed by the 100-DMA at $1885.65, shy of the crucial $1889.91 March’s lows-turned-resistance area.
Silver Price Analysis: XAG/USD rallies to one-week high, bulls await move beyond $22.00
- Silver caught aggressive bids on Thursday and surged to a one-week high.
- The lack of follow-through beyond the 50% Fibo. warrant caution for bulls.
- Break below mid-$21.00s would set the stage for further near-term losses.
Silver witnessed a dramatic intraday turnaround and rallied nearly 3% from a three-day low, around the $21.30-25 region touched earlier this Thursday. The strong momentum pushed the white metal to a one-week high during the early North American session, with bulls now awaiting sustained strength beyond the $22.00 round-figure mark.
From a technical perspective, the XAG/USD, so far, has struggled to find acceptance above the 50% Fibonacci retracement level of the $23.24-$20.46 downfall. Moreover, technical indicators on the daily chart – though have been recovering – are still holding deep in the bearish territory. This warrants caution before positioning for any further gains.
Hence, a subsequent move up is more likely to attract some selling near the 100-period SMA on the 4-hour chart, currently around the $22.10 region. This is closely followed by the 61.8% Fibo. level, around the $22.20 area, which if cleared will be seen as a fresh trigger for bulls and set the stage for an extension of the recent recovery from the YTD low.
On the flip side, any meaningful pullback now seems to find decent support near mid-$21.00s, or the 38.2% Fibo. level. Sustained breakthrough, leading to some follow-through weakness below the daily low, around the $21.30-$21.25 region, will shift the bias back in favour of bearish traders and prompt aggressive technical selling around the XAG/USD.
The downward trajectory would then drag spot prices to the 23.6% Fibo. level, around the $21.15 area, en-route the $21.00 mark. Bearish traders could eventually aim back to challenge the YTD low, around the $20.45 region touched last week.
Another impressive showing for oil as it rebounds strongly to finish up $2.87
- The June contract rolls off tomorrow
WTI crude oil is in the contract roll at the moment but both the June and July contracts followed the same path today, falling early in US trade and then rebounding strongly to finish up more than $2.
The volume is now in July with the June contract running off tomorrow. July was up $2.87 to $109.96 with about half the gain coming late. The low was $103.24 so that’s a $6.72 bounce. It breaks a two-day decline and sets up Friday’s trade near the pivotal $110 handle.
Despite a terrible risk environment, oil has a chance to finish higher for the fourth straight week.
I’m increasingly convinced that we’re in a period of supply shock. The EIA has talked about Russian oil production falling by 3 million barrels per day and there’s not enough oil anywhere to compensate for that. The US is currently adding an extra 1 mbpd via the SPR and large parts of China are shut down, yet the demand for crude is insatiable.
EU News
European equity close: Pain but off the lows
- Closing changes for the main European equity bourses
- German DAX -1.0%
- FTSE 100 -2.0%
- Stoxx 600 -1.5%
- Italy MIB -0.1%
- Spain IBEX -0.9%
Other News
Twitter says it won’t renegotiate a deal price with Elon Musk
- Comments from executives to staff
The Twitter sideshow continues as Elon Musk frets with a case of buyer’s remorse.
According to a report, executives told staff that the deal is proceeding as expected and that there’s ‘no such thing’ as a deal being ‘on hold’ as Elon Musk stated. They said they will not renegotiate on price.
All the M&A people I follow argue that it’s a very high hurdle for Elon Musk to get out of closing the deal, even if bots are much higher than stated. He waived due diligence and Twitter discloses that its bot estimates use ‘significant judgement’.
There’s lots of daylight between the current price of $37.03 and the deal price of $54.20 and that will make for an interesting trade. With tech being wrecked currently, it’s safe to say that Elon could have picked it up much cheaper if he’d waited a few months.
G7 draft communique: Will continue to support resilience of supply chain
- G7 headlines from Reuters
- Will continue to support supply chain resiliency through diversification, investment in alternative resources and new technologies, including critical minerals and renewable energies
- Central banks closely monitoring impact of prices pressures on inflation expectations, will continue to appropriately calibrate pace of monetary policy tightening in a date-dependent and clearly-communicated manner
- Committed to keeping markets open, enhancing resilience of agricultural and energy markets in line with climate and enviro goals
The one thing I’m picking up on is more urgency on minerals. There’s a supply shortage brewing and there have been some steps from governments to make it easier to get things out of the ground.
Cryptocurrency
Bitcoin climbs above 30,000 in a positive shift for risk assets
- Bitcoin has led risk trades recently
Bitcoin is up $925 to $30,112 as it climbs from the session low of $28,616 in European trade.
There’s a guy pumping BTC on CNBC so that might be some of the effect but bitcoin has been a great leading indicator for broad risk sentiment for most of this year. Keep an eye on the market.
Cardano price is still on pace to retest $0.40, but bears shouldn’t get too excited
- Cardano price is coiling in a sideways manner.
- Cardanol price Relative Strength Index hints at bearish control.
- Invalidation of the bearish thesis is a breach at $0.725.
Cardano price is preparing for a retest of $0.40 before a massive countertrend rally occurs.