Olivia

Outlook: We have to wait for Friday to get any market mover days–Germany IFO, UK retail sales, Japanese CPI. We have very little fresh US data this week to impress anyone one way or the other, leaving room for Feds to try to dominate the narratives. This time it was Cleveland Fed Mester, who told us on TV yesterday that it will take a couple of years for inflation to return to 2%, the risk if recession is real but not imminent, and demand is easier to curb than getting the supply side back in line. This is so obvious and common-sense and drama-free that of course nobody wants to listen. More interesting is Fed Gov Waller backing another 75 bp in July if the data doesn’t behave itself. You can’t extrapolate from a sample of one but note that commodity prices are down pretty much across the board–see the chart on the last page. This is not so nice for CAD/AUD but if it keeps up, nice for inflation. Now to get those incompetent logistics guys to learn to read. The place where data could be a scale-tipper is the UK. So far we have Rightmove reporting UK house… Read More »The risk of recession is real but not imminent

Overview: Most equity markets in the Asia Pacific region lost ground today. China’s Shenzhen, Hong Kong, and India were notable exceptions. The MSCI Asia Pacific Index is at its lowest level since June 2020. Europe’s Stoxx 600 is forging a base ahead of 4000 and is trading quietly with a small upside bias. The French stock market lagging after Macron lost his parliamentary majority, is raising questions about his reform agenda. US equity futures are firm, but the cash market is closed today. European bond yields are narrowly mixed, though French bonds are underperforming, and the 10-year yield is around three basis points higher. The US dollar is trading with a lower bias against all the major currencies. Sterling is the weakest and is practically flat. The Norwegian krone’s 1.2% gain leads the majors followed by the Australian and New Zealand dollars. Most emerging market currencies are also firmer, led by central Europe. Gold is consolidating quietly around $1840. August WTI is in a narrow range below $110. US natgas is extending last week's 21.5% collapse. It is off another 2.3% today. Europe’s natgas benchmark exploded almost 48% last week and is up another 3.5% today. Iron ore's precipitous drop… Read More »US holiday facilitates consolidative tone

Despite attempts at a modest rebound on Friday, European markets still finished lower for the second week in succession, posting their lowest weekly closes since March. US markets also finished the week similarly mixed, but also sharply lower, with the S&P500 posting its worst week since March 2020, ahead of the Juneteenth long weekend. As we start a new week and the mixed finish last week, European markets look set to start the week on the back foot.   At the end of last month there had been some optimism that the US economy might be able to achieve some form of soft landing. This prompted a sharp decline in US treasury yields and a rebound in US markets from their lows, as markets started to price in the prospect of a rate pause in September. The May CPI numbers upended that mindset quite abruptly, sending yields sharply higher, and stock markets back down again, a trend that was exacerbated by a policy pivot by the Federal Reserve, as well as the Swiss National Bank last week. Not only did the US central bank hike rates by 75bps but more surprisingly the SNB hiked rates as well, choosing to hike… Read More »Recession concerns set to weigh on European open

Fundamentals in focus, but key risks remain US stock and bond markets are closed at the start of the week for the Juneteenth national holiday, which comes at a good time as markets have been on a rollercoaster ride in recent days. US equities finished mostly higher on Friday, however, that came after some steep losses post Wednesday’s Federal Reserve meeting, where the US central bank hiked interest rates by 75bps and revised down its growth forecasts for this year and next. The markets have been spooked ever since the May report for US inflation was released, which showed prices rising at a faster pace than expected. Combined with a Fed in an aggressive tightening mode and this has caused risk appetite to nose-dive. The bulk of the selling last week was in the growth and pro-cyclical sectors of the economy, such as tech and the travel sector, however, the move lower was broad-based as the Vix index, Wall Street’s fear gauge, rose to its highest level since early May. In a recent note, we pointed out that historically bear markets can last up to 9 months’, thus, since the current sell off started in January, we may still have… Read More »Market update: It’s time to take a breather, but what comes next?

S&P 500 likely put in a short-term bottom, and the fresh long position is profitable from the get-go. Bonds offered the first promising signs, and so far only value has acted upon it – that provides more fuel to the upcoming relief rally. TLT performance was good, but seeing even higher volume would be more convincing regarding the rally‘s longevity. Especially since the dollar is rising again – the yen carry trade can go on. Even cryptos are having a good day today so far, meaning we have a bit more to run still. That bodes well for real assets too – both gold and silver caught a solid bid yesterday, and GDX lagging behind is balanced out by NEM outperforming. The precious metals skies are slowly brightening, and not even another 75bp hike looks being able to sink them. Deteriorating real economy data would underpin them more so than crude oil. All the demand destruction isn‘t yet in, and black gold would adjust to the arriving economy growth softpatch – but we haven‘t seen the spike yet. Anyway, it‘s worthwhile to tread cautiously with the whole portfolio because the tightening phase, the pressure on the Fed isn‘t relenting all… Read More »Little reprieve

Europe After the big losses of yesterday, as well as this week, European markets have tried to muster a semblance of a rebound as we head into the weekend, but are struggling to gain any sort of foothold, with a slide in commodity prices weighing on the FTSE100, with copper prices sliding to their lowest levels this year, and oil prices on course for their first negative week since early May. Glencore shares are outperforming after reporting that it expects to make record profits from its commodity trading division, for the first half of this year. The mining company said it expects to see profits in excess of $3.2bn for H1, which is already on the top end of expectations, for the entire year. Even without a similarly strong H2 profits are set to exceed the levels seen over the whole of 2021 when the company saw profits of $3.7bn. The rest of the basic resource sector is under pressure on the weakness in copper prices, with Rio Tinto and Antofagasta under pressure, while the slide in crude oil prices is weighing on BP and Shell.   Today’s Q1 trading update from Tesco has elicited a fairly indifferent response, with… Read More »European markets set to close at a three-month low

While inflation continues to wreak havoc, gold is reluctant to respond. Will it finally change and the price of the yellow metal rise? The Fourth Horseman of the Apocalypse The end is nigh! There should be no doubt about it now, as more horsemen of the Apocalypse are coming (see the painting below). The first was Pestilence. Two years ago, the COVID-19 pandemic plunged the world into a Great Lockdown and the deepest recession since the Great Depression. At the end of February 2022, the Russian troops brought War and Death to the Ukraine. Also, say hello to Famine, another horseman. To be clear, I don’t mean ‘hunger’ in the United States or other developed countries (although people in besieged Mariupol are running out of drinking water and food), but rather dearth and dearness. In other words: inflation. It doesn’t look very optimistic, indeed. As you can see in the chart below, the annual CPI rate has accelerated from 0.2% in May 2020 to over 8.0% in March and April 2022. Importantly, the core CPI, which excludes food and energy prices, has also surged recently, rallying from 1.25% two years ago to above 6.0% now. That’s a really high increase… Read More »Will gold save souls during the inflationary apocalypse?

On the one-hour chart, GBP/USD is forming higher highs and higher lows after dropping to its two-year low at 1.19341. Moreover, buyers achieved gains above both the 50 and 200-exponential moving averages. Nonetheless, to ensure that the uptrend continues, it is imperative that the pair breaches Thursday's top at 1.24047. In the short term, the candlesticks' bodies are shortening, which implies positive momentum is waning as buying forces do not seem strong enough to end on a higher note. In light of that, we shouldn't be surprised if the price consolidates around the 200-EMA for some time until we get a better indication of the market's direction. A sustained rally for the pound should lead to the price going higher than its previous high, resulting in a larger candlestick body. If that is the case, the pair may go higher to test the 1.24047 resistance level. Assuming the price moves above this roadblock for a sustained period, the next hurdle would be 1.24700. Alternatively, suppose price consolidation leads to an increase in selling pressure. The price can then make its way back down towards the 1.22507 support, which coincides with the 50-EMA. When this confluence breaks, the short-term uptrend will… Read More »GBP/USD waiting for a directional indication after rally stalled [Video]

Summary United States: Recession Risks Rise Last week's stronger-than-expected CPI print laid the groundwork for this week, sending markets into a churn and raising the risks of recession. We now look for the U.S. economy to experience a mild contraction in mid-2023. Economic data released this week add to evidence that the chances of a soft landing are fading. Next week: Existing Home Sales (Tues), New Home Sales (Fri) International: Bank of England Raises Rates by 25 bps as Growth Unexpectedly Contracts The outlook for the U.K. economy may be starting to cloud, as the economy saw an unexpected contraction, with GDP falling 0.3% month-over-month in April. Against a backdrop of slowing growth and high inflation, the BoE delivered a 25 bps rate hike at its June monetary policy meeting, bringing the Bank Rate to 1.25%. Next week: Canada CPI (Wed), U.K. CPI & PMIs (Wed/Thurs), Eurozone PMIs (Thurs) Interest Rate Watch: Treasuries Tumble as Yields React to CPI, Fed New economic data and aggressive Federal Reserve actions sent Treasury yields up sharply this week.Monday, in particular, was one of the most volatile days of the year for bond markets as yields spiked roughly 30 bps across most parts of… Read More »Weekly economic and financial commentary

I think we've all earned a weekend break in the sun after a quite extraordinary week in the markets that saw plenty of central bank action, even from those not scheduled to meet. Stock markets are ending the week on a positive note, not that anyone is getting carried away with today's price action after turbulent trading conditions in recent days. Triple witching may also be a factor in today's moves which is another reason not to get excited. Recessions are increasingly likely as central banks race to dramatically raise rates before inflation spirals out of control. It is better than the alternative though; stagflation. A term that's been thrown around way too much in recent months which perhaps highlights the trepidation around it. We are not in a stagflationary environment, nor will we be later this year. But the risk of one is rising which is why central banks are becoming increasingly accepting of their actions tipping the economy into recession. There are a few exceptions, obviously. The Bank of Japan doesn't have an inflation problem; in fact, it's just about hitting its target thanks to high energy costs and that won't last. Its issue is a result of… Read More »A week to remember