The weakness seen in the US equity markets spread to Asian stocks today and sent their bond yields higher. Investors are worried that high inflation numbers from the US will bring about more aggressive Federal Reserve policy tightening. The US annual inflation growth for May accelerated to 8.6%. This was the highest reading since 1981. Analyst consensus had expected the yearly rate to be 8.3%. The prices for energy (+34.6%) and food (+10.1%) made record increases. For food, this was the first increase of 10% or more since March 1981. By reading further, you agree with our disclaimer at the end of this report and acknowledge that we do not provide investment advice.
Major US and European stock index futures continued the slide in the Asian session today. There are no major macroeconomic data releases scheduled for today but Fed’s rate decision and press conference on Wednesday are the highlights of the week. They are likely to bring trading opportunities (increased volatility) so now is the time to make sure you have enough trading capital on your account to take advantage of the added volatility. We will also have the US PPI numbers and US retail sales figures coming out this week so it should be a great week for trading the indices, gold and USD pairs.
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DAX – ECB president Lagarde’s comments about EU fragmentation combined with stagflation fears and the red-hot inflation numbers from the US have sent the German index plunging lower. When new information hits the markets investors need to adjust to it and this could cause violent moves. In this case, the new information is that the EU is planning to raise rates aggressively and without any concrete guidance on how to prevent a re-run of the Euro-crisis. If signalling from the central bank doesn’t change in this regard European equities could be headed to a long-term bear market. We now have a lower high in the weekly time frame and a strong move lower after it. This increases the risk of DAX moving below a support range (13168 – 13270) created by the higher swing low created in May and a bear channel low. A decisive break below the area would open a way to the next support at 12430.
DJ – As I said on Friday morning, US equity investors didn’t like the possibility of a re-run of the Euro crisis and now the latest inflation report showed that the rate of price increases hadn’t only increased but some items like food were getting pricier at a record pace. Higher than expected inflation increases fears that the Fed will be more aggressive with rate hikes than expected. The nearest key support level is at 30636 (the May low) and the one after it is the 38.2% retracement level that coincides with the bear channel low at 29800.
USOIL – Last week was a momentum loss week in USOIL. This is a short-term bearish signal and could lead to either more sideways movement or to the market correcting lower. The market is now trading at a bull channel low at 1154.24 that could act as a support but if the level doesn’t hold the next key support is at 109.92 (coincides roughly with the 50% Fibo-level at 109.60). The nearest key resistance levels are 119.01 and 123.80.
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||Fed hiked by 0.5% in May but according to Powell 0.75% hikes are off the table.|
|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 been drifting lower since early May as equity investors have moved over to T-Bonds in search of safety.|
|Employment||The May non-farm payrolls increased by 390K (436K previous) while the participation rate was confirmed at 62.3% (62.2% previous). The unemployment rate remained unchanged at 3.6%.|
|Inflation||The US annual inflation growth for May accelerated to 8.6%. This was the highest reading since 1981. Analyst consensus had expected the yearly rate to be 8.3%. The prices for energy (+34.6%) and food (+10.1%) made record increases. For food, this was the first increase of 10% or more since March 1981.|
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The Next Main Risk Events
- USD – PPI m/m
- USD – Core PPI m/m
- CNY – Industrial Production y/y
- CNY – Retail Sales y/y
- USD – Core Retail Sales m/m
- USD – Retail Sales m/m
- USD – Empire State Manufacturing Index
- EUR – ECB President Lagarde Speaks
- USD – FOMC Economic Projections
- USD – FOMC Statement
- USD – Federal Funds Rate
For more information and details see the TIOmarkets economic calendar here.
Chief Market Analyst
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