Financial markets remain clouded in uncertainty as we step into May. Soaring inflation plaguing major economies has pressured central banks to raise interest rates. As expected, the US Federal Reserve announced its largest interest rate hike since 2000 on Wednesday, raising its benchmark rate by half a percentage point in an attempt to step up its fight to combat spiralling inflation. Annual inflation in the US currently stands at an eye-watering 8.5 per cent, with the next release due on 11th may. Interestingly, according to Fed Chair Jerome Powell, multiple 50-basis point rate hikes are on the table for upcoming meetings.
Following suit was the Bank of England (BoE) on Thursday, raising its Bank Rate by a quarter of a percentage point from 0.75 per cent to 1.0 per cent, in a bid to tame rising inflation, its highest level in 13 years. Annual inflation in the UK clocked a 30-year high of 7 per cent in March, following February’s 6.2 per cent reading. The next release is due on 18th May.
Adding to market uncertainty is the ongoing conflict in Ukraine. Missiles landed in Kyiv last week at a time when Ukraine’s president hosted the UN secretary-general, while the European Union recently proposed a ban on Russian Crude oil by the end of 2022. Also ramping up uncertainty, of course, is the Covid situation in China. Adhering to a zero-Covid policy, the world’s second largest economy introduced lockdown measures across two of its biggest cities: Beijing and Shanghai.
Major US equity benchmarks fell across the board in Q1. The Dow Jones finished south by 4.6 per cent, with the S&P 500 and Nasdaq Composite concluding the quarter underwater by an eye-watering 5.0 per cent and 9.1 per cent, respectively. US stocks also continued to tumble during April; the Nasdaq penciled in its worst month’s performance since 2008 in April and consequently entered bear market territory (-25 per cent from the high).
The technical framework on the daily timeframe out of the Nasdaq is interesting, exposing the likelihood of additional downside in May. Trend studies reveal a fresh low took shape after breaching the 12,555 trough (14th March 2022), with further underperformance probable until 11,400ish, composed of an AB=CD bullish pattern that’s accompanied by a 50.0% retracement at 11,433 (drawn from the low 6,631) and channel support, etched from the low 13,094. Adding to the bearish scenery is the relative strength index (RSI), visibly journeying south of its 50.00 centerline and indicator trendline support: negative momentum.
Should buyers regain consciousness, however, supply resides at 13,694-13,320, joined by channel support, extended from the high 15,852.
Foreign Exchange (Forex)
In the foreign exchange market, the US dollar has been on a tear. Against a basket of six international currencies, the US Dollar Index (USDX), a widely followed USD measure, added 5.0 per cent in April, its largest one-month gain since early 2015. The impressive run elevated the buck to a high of 103.93 in recent trading sessions, levels not visited since 2002.
Year to date, the index is higher by 8 per cent (chart below).
Europe’s shared currency traded lower by 2.4 per cent against its US counterpart in April, its largest one-month tumble since March 2020, movement that pulled EUR/USD (below) under the pandemic low of $1.0638 (March 2020). Technically speaking, the weekly timeframe’s Quasimodo supports between $1.0467 and $1.0517 have offered little to persuade buyers to commit. One factor likely discouraging any meaningful buying at current price is the downtrend, dominant since the beginning of 2021. Adding to this, realised clearly from the monthly timeframe, the overall vibe has been to the downside since topping in April 2008. Territory beneath current weekly supports, therefore, calls attention towards the $1.0340 2nd January low (2017) in May.
A relentless rise in US Treasury yields was seen across the curve in Q1, action boosting the US dollar. April saw the benchmark 10-year yield extend gains, with month-to-date action in May navigating waters beyond the widely watched 3.0 per cent mark—its highest level since late 2018.
Technical traders may want to acknowledge the weekly inverted head and shoulders pattern that’s poised to complete in May. The neckline breach, drawn from the high 1.968%, was engulfed in early 2022 and the 10-year yield has outperformed since. The pattern’s profit objective (applied by measuring the distance from the trough to the neckline which is then added to the neckline from the breakout point) is arranged at 3.242%.
06/05/2022: US Non-Farm Employment Change
11/05/2022: US Inflation and Core US Inflation (CPI) m/m
12/05/2022: US Producer Price Index (PPI) m/m
17/05/2022: RBA Monetary Policy Meeting Minutes
17/05/2022: US Retail Sales and Core Retail Sales m/m
18/05/2022: UK Inflation (CPI) y/y
18/05/2022: Canada Inflation (CPI) m/m
19/05/2022: Australia Employment Change Unemployment Rate
20/05/2022: German Flash Manufacturing and Services PMIs