US President Joe Biden seeks for $33 billion of more support to Ukraine. He signed the bill over the weekend but it needs to be approved by the Congress. The size of the bill means (if approved) that the US is highly committed to preventing Russia from winning the war. The intended funding package includes in excess of $20 billion for weapons and other military assistance and $8.5 billion of economic help to assist the Ukrainian government. If the bill is approved Ukraine will also receive $3 billion in humanitarian aid. It’s early to speculate how this will impact the markets but if approved the aid will level the playing field and could, according to military experts, lead to Ukraine winning the war. If over the coming weeks and months there are signs that this more committed approach will bring about peace in Europe quicker than earlier expected then we should see the risk sentiment to improve. This would benefit stocks and other cyclical markets. By then hopefully worries related to the property market and Covid lock downs in China have eased. With several bank holidays in various markets (see the details here) the day is likely to be a slow one. Today, therefore, is a good day for strategy development and self evaluation. By reading further, you agree with our disclaimer at the end of this report and acknowledge that we do not provide investment advice.
The price of USNGAS had a gap opening at the start of trading this week. The jump higher in the price was caused by an announcement that the EU energy ministers are holding an emergency meeting today. EU leaders want to find a united response to demands made by Moscow that Russian gas has to be paid in roubles or their supply will be cut off.
Russia is a major producer of oil and gas with billions of income from so called carbon exports. The challenge for the EU is that it’s highly dependent on Russian gas, which meets 40% of the demand in the bloc.In some member states, close to 100% of gas comes from Russia. Russia actually makes substantially more money from oil than gas which means the country isn’t hurt so badly by possible ban on gas as some European countries, like Germany. This makes gas a political tool while oil remains a cash cow for the Russian economy and the war machine. USNGAS is trading at a key resistance level at 7.521 with the nearest key support level at 6.837. Above this support the market stays bullish. If the level is broken then we could see a move to the 6.482 support level.
The price of oil has been sliding since the US session open on Friday as the risk sentiment soured again. Stocks and commodity currencies took yet another dive deeper and now investors are concerned about slowing economic growth in China. The country is the biggest oil importer globally and disruptions caused to its economic growth therefore outweigh the potential for further uncertainty on oil trade between the European Union and the Russian Federation. Oil prices have been under further pressure on China’s release of factory activity data over the weekend. The data showed a second month of contraction in the Chinese factory activity. The level was the lowest since the Q1 2020 and was caused by the Covid lock downs. Oil is now trading at a support level at 102.18 after failing to penetrate the top of a bear channel. If the level breaks we might see a move down to 95 – 98 dollar range. Above the level the nearest resistance level is at 104.23 which needs to be taken out and the market needs to hold above the level in order to negate the bearish indications of the drop seen on Friday. Keep an eye out for news from the EU energy ministers emergency conference.
Gold sold off on Friday as the market couldn’t hold above the key price level at 1911.15. I said on Friday that If the level is penetrated decisively, we should expect to see the market moving to the 1927.30 – 1936 range but that a failure of this rally attempt would be likely to send gold back to the 1897 – 1898 region. This alternative downside target was reached after the market started to roll over and couldn’t hold above the 1911.15 level. Traders are concerned about the hawkishness of the Federal Reserve. It’s believed that the Fed could hike as much as 0.50% this week and a whopping 0.75% in July. Bond markets have responded to this by exiting their positions (rising interest rates lower the value of bonds) and thus pushing the yields higher. Benchmark 10-year US Treasury yields have risen to multi-year highs as any rally attempts in the T-Bond market have been met with renewed selling pressure. Gold is trading inside a bearish channel. If it breaks out to the upside the next key resistance is fairly close at 1894.44 while the next challenge for the bulls is at 1902.50. The next key price level below the current market price is 1871.73.
Macro Drivers for the USD
As the most followed, invested and traded markets for risky assets are priced in the USD it is helpful to understand what macroeconomic factors impact the other side of the equation, the USD. Whether we are trading EURUSD, XAUUSD or US equity CFDs the factors impacting the dollar, the nominator in the equation, have a significant role in the formation of all medium to long-term price action. The following table summarises the most important fundamentals.
|The Federal Reserve||Several FOMC members support 0.5% rate hike in May. The Fed is prepared to taper by $60B of treasuries and $35B of mortgage back securities per month.|
|Stimulus||The Fed is looking to scale down its bond-buying program (QE) but has signalled that it be careful with tightening due to the war in Europe.|
|Yields||The US 10-year treasury yield has risen to 2.187% as investors sell the bonds and adjust to the expected rate hikes.|
|Employment||The March non-farm payrolls increased by 431K while the analyst consensus had predicted 492K new jobs. The unemployment rate dropped to 3.6% and average hourly earnings were in line with expectations (0.4% vs. 0.4% expected).|
|Inflation||The annual headline inflation reading for January came in at 7.5% (7% prior). This was the highest CPI print in 40 years. The core CPI (all items less food and energy) was confirmed at 6.0% (5.5% previous).|
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The Next Main Risk Events
- USD – ISM Manufacturing PMI
- AUD – Cash Rate
- AUD – RBA Rate Statement
- USD – JOLTS Job Openings
- NZD – RBNZ Financial Stability Report
- NZD – Employment Change q/q
- NZD – Unemployment Rate
- EUR – Spanish Unemployment Change
For more information and details see the TIOmarkets economic calendar here.
Chief Market Analyst
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