S&P 500, Oil and Forex Analysis – Never Underestimate the Purchasing Power of the US Consumer

Analysis of the Global Macro and Stock Markets

While the market is still trading short-term impulses, we are undoubtedly approaching Fed and inflation high. This occurs at a time when the equities market is at its most negative.

Remember that fear of the Fed has been at the basis of stock market volatility.

However, never underestimate the purchasing power of the American consumer, as the strong retail sales report pushes back against the US recessionary fat tail, while pricing out China's extreme left tail (lockdown) should meld to support global equity markets, with supply chain reopening easing inflation concerns, at least in the short term.

This has enabled asset managers to sort through the debris of the S&P 500's 15% drop in four weeks.

All of the basic elements that may be given as a reason to buy back in need stability. And there are evidence that this is occurring.

Fundamental Analysis of Oil

While optimism about Chinese oil consumption prevailed yesterday, the EU may triumph today due to disagreements about the composition of a Russian embargo. The next chance to agree on such an embargo will be at the "special" meeting on May 30-31, thus the absence of an EU Russian oil boycott may constrain top-side ambition until then.

In the long run, less bad news from China provides a sting in the tail in the shape of substantially greater oil demand and prices, which is good for producers but bad for consumers.

With unaffordable gas prices as a result of demand exceeding supply, the Fed will be on a mission to raise rates to at least moderate the demand side of the economy, which could eventually lead to a mild form of demand destruction in which buyers strike rather than splurge during peak driving season in the United States.

Fundamental Analysis of the Chinese Yuan in FOREX

The IMF's decision to increase the RMB's weighting in the SDR basket by 1.36 percentage points shows that the RMB's appeal as a global currency has grown gradually since the 2015 SDR review. Given the country's present vulnerability as it prepares to reopen, this might motivate additional reserve managers to do the same.

Of course, the reopening plans might be derailed. Nonetheless, the increasing readiness to reopen implies fewer new covid cases, which should allow for additional stimulus and boost the Chinese stock market. It should also draw capital inflows, which is vital for the Yuan.

In the short term, pricing out China's severe left tail should help global equities markets and diminish safe-haven demand in the FX Asia basket.