Olivia

S&P 500 finally enters official bear market territory. Equities swing wildly after Fed hikes by 75 basis points. Does the Bank of Japan open the door to H2's best trading opportunity? The weeks keep on racking up and so too do the nerves of investors who are kept on the rack by the latest developments. Let us just have a quick recap and see where we might go from here. We entered the week in nervous territory but for the most part, expecting a 50 basis point hike from the Fed. This had been well telegraphed and despite last Friday's shock CPI print most felt 50 was the way forward. However, we then got word via the WSJ that 75 basis points were the tonic required and the markets headed for the exit doors. The worst fears were confirmed on Wednesday when the Fed did indeed hike by 75 basis points, the first rise of such magnitude since 1994. Most of us were not in the market to remember the last time and so perhaps that explains our bizarre reaction to what patently is bad news. The main indices went on a relief rampage with the Nasdaq nearly up 5% at… Read More »Week Ahead on Wall Street (SPX QQQ): The bear is here, Fed takes the fight to inflation and BOJ tees up Yen

EUR/USD – 1.0540 Despite euro's resumption of decline from May's 1.0786 peak to a 1-month bottom of 1.0360 in post-FOMC Wednesday, subsequent rebound and then yesterday's rally above 1.0507 (now support) to 1.0601 on broad-based usd's selloff signals choppy swings above May's 5-year 1.0350 trough would continue but 1.0642 should cap upside and yield retreat. On the downside, only a daily close below 1.0507 would indicate aforesaid recovery over and risk weakness towards 1.0452. Data to be released on Friday New Zealand manufacturing PMI, Japan interest rate decision. Italy trade balance, EU HICP. Canada producer prices, U.S. industrial production, capacity utilization, manufacturing output and leading index.  

Equity markets are experiencing another day of pain on Thursday as central banks continue to signal a willingness to sacrifice the economy in order to get inflation under control. Central banks are full of surprises this week whether it's the Fed accepting a recession as the cost of price stability, the SNB raising rates by 50 basis points out of nowhere, the ECB holding an emergency meeting or the BoE seemingly crossing its fingers and hoping 11% inflation goes away on its own. What will the BoJ bring after a busy week in the bond markets? The SNB hike was arguably the most surprising of the lot, with the consensus before being that they would stand pat and resist further strengthening the currency which has been boosted by safe-haven flows. Not only did it not, but it also hiked beyond all expectations and appears to have warmed to the idea of a strong franc. I'd be more amazed at the shift if the SNB under Thomas Jordan didn't have a history of sudden u-turns without warning. Perhaps the most surprising thing about the BoE today was how underwhelming the policy response was. At a time when the central bank announced… Read More »Is a recession now inevitable?

The BOE is likely to hike the key rate by another 25 bps to 1.25% on Thursday. A surprise 50 bps hike cannot be ruled out if the BOE prioritizes inflation control. GBP/USD has room to recover but it depends on the bank’s tightening guidance. GBP/USD could confirm a bullish reversal from two-year troughs should the Bank of England (BOE) surprise markets by announcing a 50 basis point interest rate hike on Thursday at 11:00 GMT.   BOE could take global central banks’ lead Until a day ago, a 50 bps rate hike by the UK central bank could not be imagined. With the US Federal Reserve (Fed), however, now seen delivering a 75 bps rate hike at its June policy meeting, seeing the BOE going large on the rate lift-off is not unthinkable. Adding to this, the Reserve Bank of Australia (RBA) announced a bigger-than-expected 50 bps hike earlier this month and the Reserve Bank of New Zealand (RBNZ) also hiked by a half-point. Markets have priced in a roughly 40% chance of a double-dose lift-off at the June MPC meeting. According to the Bloomberg survey of economists, three of the BOE’s nine officials are expected to vote for… Read More »BOE Preview: A surprise 50 bps rate hike on the table?

The Federal Reserve has raised rates by 75 bps points, a substantial move. Firm commitments signal the Fed prioritizes crushing inflation and is ready to assume the consequences. The dollar is set to continue its gradual advance, building on monetary policy divergence.  Confidence in the Fed may lower long-term yields, supporting gold.  Is the Federal Reserve serious enough about fighting inflation? That is the main question for markets, and my answer is yes. The decision only provides a nod to the Fed's other mandate of full employment, and undoubtedly focuses on crushing prices. The words “strongly committed” are a significant upgrade to the Fed's language.  Could the Fed have done more? Yes, Powell is not Paul Volcker, who destroyed the US economy in the 1980s to change Americans' inflation mindset. However, the moves have undoubtedly conveyed a clear message to markets.  For the dollar, the reaction is straightforward monetary policy divergence favors the greenback, which could continue advancing against all its peers. Moreover, other central banks may be forced to act in response to the Fed. The first tests are for the SNB, BOE and BOJ, all set to make announcements in the next 36 hours.  For gold, the place to… Read More »Fed Quick Analysis: Powell presents hawkish hike, dollar to march forward, stocks to recover (later)

EUR/USD – 1.0428 Although euro's selloff from Thur's post-ECB 1.0773 high to a near 1-month bottom at 1.0398 in Asia Tue due to active safe-haven USD's buying on global stock market rout and rally in US yields suggests re-test of May's 5-year trough at 1.0350 would be seen, subsequent rebound would yield range trading and below would extend towards 1.0320. On the upside, only a daily close above 1.0507 would indicate a temporary trough is in place and risk stronger retracement towards 1.0535, then 1.0550. Data to be released on Wednesday New Zealand current account, Japan machinery orders, tertiary industry activities, Australia consumer sentiment, China industrial output, retail sales. Germany wholesale price index, Swiss producer/import price, France CPI, EU trade balance, industrial production. U.S. MBA mortgage application, NY Fed manufacturing, import prices, export prices, retail sales, business inventories, NAHB housing market index, Fed interest rate decision and Canada housing starts.

With the Federal Reserve expected to raise interest rates for the third time this year, the U.S. dollar is hovering near multi-year and in the case of USD/JPY, multi-decade highs. The greenback retreated slightly on the eve of FOMC but don’t be mistaken, the Federal Reserve will be very hawkish on Wednesday. A half point increase has been completely discounted and in the last 24 hours, expectations for a 75bp hike soared to 96% according to the CME’s Fed Watch tool.  Is Inflation Alarming Enough to Risk Recession? A 75bp hike would be a technically and psychologically big move – the largest one time hike for the Fed since 1994. How the U.S. dollar reacts will depend entirely on whether the central bank opts for 50bp or 75bp move. For the Fed, the question is whether inflation conditions are alarming enough for a drastic move that would inevitably crush the equity markets and heighten the risk of recession next year.   The short answer is YES.  Consumer prices hit a 40 year high in May and the pain will continue as producer prices rise 10.8% year over year. Short and long term inflation expectations continued to climb according to the… Read More »FOMC Preview: Will Fed Drive USD/JPY to 150?

And the line from The Big Short movie, “it all came crashing down” comes to mind. We have been warning of precisely this since the start of the year, and even with the huge collapse already seen in US equities, I am not changing my view that investors should continue to play defence. “Protect your portfolios” from the roof-tops we should all scream. The situation is not a buy the dip or look across the valley scenario. People need to step back and see the bigger historical picture. What I am about to say will not be a surprise to anyone, but investors need to connect the dots. At the point of highest confidence and enthusiasm in global stock markets and others, there were already worrying signs coming from inflation, not transitory, a moderation in manufacturing globally, and consumer sentiment. Sales have remained firm, but consumer sentiment has been nose-diving to GFC levels for some time. Suggesting there may be a 'last hurrah' by consumers taking place at the moment. Both in the USA and elsewhere. We haven’t even gotten to the war in Ukraine yet? Permanently higher food and energy prices and even shortages of both. The most powerful… Read More »Historic moment not a dip

The S&P 500 is on course to enter bear market territory at the start of this week, as US futures open sharply lower on the back of the the higher-than-expected US inflation report at the end of last week. US stocks lost 5% last week and closed lower for the ninth time in ten weeks. The risk off trade is in full swing. Not only are global stocks under pressure, but so are US Treasuries. The 2-year US Treasury yield is now approaching 3.2%, and short-term US yields have risen by 11 basis points so far this morning. The US yield-curve is fast approaching negative territory, it is currently +9 basis points, it is worth noting that an inverted yield curve is a recessionary signal. Thus, the macro-economic environment has deteriorated as we lead up to this week’s Federal Reserve meeting and the Bank of England meeting.  75bp rate rise now on the table at the Fed  Both central banks are expected to raise interest rates this week. There is now a 100% chance of a Fed rate hike this week, however, expectations of the size of the rate hike have shifted considerably over the last month. A month ago,… Read More »BoE and Fed meetings puncture this week as investors fret

Friday’s Consumer Price Index Report sent shockwaves through financial markets. The 8.6% annual reading was yet another new multi-decade high – dealing a body blow to analysts who believed inflation pressures had peaked. Investors now fear the Federal Reserve will have to undertake more aggressive tightening actions. Both bonds and stocks tumbled into the close of trading last week. Precious metals markets, however, perked up. Gold rallied while silver, which has been lagging of late, managed to put together a small advance on Friday. More impressive (and perhaps more telling) was the price action in the mining sector. Leading silver producers First Majestic (AG), Pan American Silver (PAAS), and Hecla Mining (HL) gained 6.6%, 5.9%, and 7.4%, respectively, on Friday. Investors are seeking safe haven in the precious metals sector, including mining stocks as proxies for gold and silver. Of course, no mining company or exchange-traded product tied to precious metals spot prices can substitute for the real thing. Demand for physical bullion has remained strong in recent months and could jump dramatically during the next round of turmoil in financial markets. The risk of a stock market crash is increasing as the Fed hikes into an environment of collapsing… Read More »Inflation goes from bad to worse… to even worse than reported