US Open Note – Recession fears keep jolting markets



Signs of recession pop up in earnings

Sellers stormed into stock markets as giant US retailers Target and Walmart revealed a hit in margins on the back of rising labor and energy costs, with the former losing more than a third of its share value on Wednesday despite serving only local clients.

The jittery earnings surprise follows Powell’s commitment to higher interest rates earlier this week, making investors think more seriously that the mix of inflation and monetary tightening could prove toxic for consumers.

Rising expenses, however, were not the only barricade. The root of the problem started a year ago when the two retailers secured enough inventories to avoid supply constraints while savings were accumulating. But the switch from lockdowns caught them by surprise as consumers started to spend more on fashionable clothes and travel related products than high-margin furniture and bikes. Whether the retailers will start cutting prices to get rid of inventories that remain to be seen.

Futures tracking the S&P 500, Nasdaq 100 and Dow Jones are down by 1.40% pointing to another brutal session when Wall Street opens today. The European indices are having a tough day too, set to close lower by 2.0%, with all sub-sectors trading in the red. From a technical perspective, major US and European indices haven’t posted new lower lows yet despite the ongoing turmoil, increasing speculation that selling interest is calming down.

On Thursday, the focus will be on earnings from Kohl's and BJ's Wholesale Club.

Dollar on the back foot, but for how long?

In the FX space, the bearish shock waves from the earnings reached the US dollar too, settling it the worst performer of the day, especially against the Swiss franc and the New Zealand dollar. Initial jobless claims for the week ending May 14 added more fuel to the sell-off, showing applications for unemployment benefits inching to 218k compared to 200k expected. Dollar/yen tumbled to a three-week low of 127.48 in the aftermath, while dollar/swiss franc nosedived to 0.9732. While the greenback is considered a safe haven asset, it cannot resist when economic risks rise in the domestic economy.

The European currencies advanced on the back of the dollar’s weakness, though it’s too early to become confident in the euro and the pound. The minutes from April’s ECB policy meeting revealed concerns over inflation and determination to achieve price stability, while separate sources stated that policymakers are preparing for two 25 bps rate hikes, leaving the door open for a third one as well this year.

On the other hand, the war factor, and the supply consequences from sanctions could squeeze the economy at a later stage and ruin the central bank’s rate hike plans. Disappointing construction and current account stats send some warnings today. Technically, the 20-day simple moving average (SMA) is keeping euro/dollar trapped below 1.0535 despite today’s upside pressures.

Pound/dollar, which is already suffering from the BoE’s conservative tone on future rate increases and the post-Brexit trade issues with the EU, is also stuck below its 20-day SMA at 1.2437 for the third consecutive day.

Aussie/dollar and kiwi/dollar have still some distance to reach their constraining 20-day SMAs, though more volatility could emerge in those markets next week given the federal election in Australia on May 21 and wage data out of New Zealand.

Commodities

Turning to commodities, the bulls returned to the gold market, lifting the price towards the tough resistance of $1,840/ounce. The 200-day SMA is positioned in the same location.

On the other hand, WTI oil futures are trading negative on fears of economic contraction. In yesterday’s news, gasoline and crude stocks fell more than analysts expected last week according to the EIA.

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