US Open Note – Stocks pare gains; European currencies slip too after nice rally



Recession not fully priced in

Who will pay the price? That's the question that bothers investors nowadays as businesses feel more confident to transfer rising production costs to consumers and central banks constantly message markets that additional rate increases are the immediate solution for spiraling inflation.

Further monetary tightening is largely anticipated in the UK as inflation clocked in at a new 40-year high of 9.0% y/y as expected in April, while the Fed chief stated yesterday that rates could move beyond the neutral level, which neither stimulates nor constrains economic activity. Canadian inflation surged above forecasts in April to a new 31-year high of 6.8% y/y, making a 50 bps rate increase almost certain in June.

Therefore, with stocks having already suffered harshly in monetary tightening expectations, any additional dips are looking attractive now.

The bad news is that the increasing talk of recession has not matured yet. Although Goldman Sachs was the latest bank to send recession warnings and cut its forecast for the S&P 500, while the extensive decline in US mortgage applications is something to keep a close eye too, earnings releases have barely reflected the risk of a financial shock so far. Also, retail sales and employment data remained resilient despite the quarterly GDP decline in several major economies in Q1.

In addition, falling Covid cases in China are raising optimism that curbs could soon be lifted, allowing more demand from the second biggest economy of the world. Though, that could represent a dead cat bounce as long as the Ukrainian war and the sanction consequences drag on global supply chains.

In the latest sanctions news, the US is now considering adding more pressure on Moscow by blocking entirely Russian bond payments. Finland and Sweden have formally applied to join the NATO alliance today, breaking their longtime neutral military stance.

Risk-on sentiment fades

Global bond markets are now back on the slippery road, pushing yields higher, and hence stock indices lower. The pan-European STOXX 600 is paring its latest bounce, with losses in technology and consumer non-cyclical shares offsetting gains in energy and real estate equities. Wall Street is following lower too, with the Nasdaq 100 plunging by 1.5% at the start of the US trading.

European currencies stall

Turning to FX markets, the European currencies have stalled again following yesterday’s exciting rebound. ECB policymakers were on the wires for another day with scope to highlight the need for monetary normalization, though regional macroeconomic projections are still quite uncertain thanks to the Ukrainian war, feeding skepticism that the central bank may see its rate hike plans collapsing soon. Similar risks are weighing on the pound, with post-Brexit trade issues adding to Britain’s challenges.

Euro/dollar and pound/dollar are facing strong resistance around their 20-day simple moving average (SMA) at 1.0550 and 1.2485, respectively. Euro/pound is setting a foothold around its 200-day SMA at 0.8440.

Dollar/loonie lost some ground in the wake of upbeat inflation figures, easing to an intra-day low of 1.2800, while dollar/yen seems to be giving up the battle with the 20-day SMA at 129.20.

Other assets

Meanwhile in commodities, WTI oil futures are stubbornly pushing for a close above the tough $114.30/ barrel for the third consecutive day. Gold has been trading quietly below $1,815/ounce for almost a week.

Cryptocurrencies are not in good mood either, with Bitcoin and Ethereum extending their neutral trajectory marginally above their recent lows.

 

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