Fundamental Analysis of the Global Economy and Stock Markets
This market, on average, trades a new narrative every two days (and occasionally swings through four economic cycles in a single session); this sell-off might all reverse just as rapidly as it has rolled over. Nonetheless, investors do not appear to be in a hurry to buy the dip or defend any technical area at the moment.
Due to the vicious nature of the two-day rollover, I would keep an eye on miners, given that investors have been bullish on this sector due to commodity supercycle views. I'd keep an eye on the names in the S&P500 - Nucor, FCX, and NEM – that have been among the poorest performers over the last two sessions. And you most emphatically do not want to be the last person on the dance floor if the commodities supercycle music comes to a halt.
From any pro's perspective, real yields should continue to be the key macro variable in 2022--it is astonishing how low they remain. I would anticipate traders to gravitate toward the notion that real rates must climb further — either as inflation forecasts decline as growth expectations decrease or as central bank hawkishness increases. Thus, the climate remains extremely difficult for risk appetite, since long-duration assets are certain to feel the pain.
Fundamental Analysis of Oil
Commodities ended the week weak across the board, with oil closing down 168 basis points on Friday.
In the case of oil, indications that Chinese oil demand has fallen to its lowest level since the 2020 Wuhan lockdown put a stop to any hopes of a weekend rise.
Additionally, other sources indicate that Russian oil has begun exploring new measures to mitigate the possibility of a worldwide supply shortage, which is impacting on sentiment.
With an increase in the number of tankers departing Russia for "destination unknown," there is evidence of classic commodities tactics at work. Indeed, this is a telltale sign that the oil is being transported to larger ships at sea, where it is unloaded and mixed in with other cargo, thereby blurring the lines. The circular structure of most of the energy system, as well as the sale of displaced Russian crude to countries such as India, can free up additional supplies for western economies.
Considerations of a commodities supercycle gradually give way to recession fears, which are exacerbated by the Fed's continued rate hike rhetoric.
Fundamental Analysis of the Forex Markets
I expect the US dollar to maintain its strength throughout the channel of higher US yields and to reign supreme during periods when the market is focused on slow global growth, which results in weaker risk sentiment.
Euro
Macron has reclaimed the lead in French polls, and the market is now pricing in an ECB rate hike in July. However, the Fed has been much more aggressive in its repricing, leaving EURUSD tracking rate differentials and the dollar benefiting from a very hawkish Fed.
Pound
Not all inflation is created equal. UK inflation may be three times the Bank of England's objective, but it is being driven by cost-push pressures rather than demand-pull forces; the UK consumer is already struggling with the higher cost of living, showing that the demand side of the economy is already flagging.
The Bank of England has been candid and forthright about its intention to hike rates further, but the market overestimates the extent to which that tightening will occur. In the United States, the terminal rate might easily be 3.5 percent. In the United Kingdom, it is unlikely to exceed 1.5 percent.
Yen
Demand for USDJPY in Tokyo pushed the pair up from 128.20/30 to a high of 128.70 before sellers returned. The pair bottomed out in the 128.70 zone for the fourth time last week, and this level remains crucial resistance in the immediate term.
According to reports in the Japanese media, Japanese Finance Minister Suzuki and US Treasury Secretary Yellen discussed a possible combined intervention to boost the JPY. On the US side, the tone was one of "positive contemplation," bringing USDJPY to overnight lows of 127.74, but dip buyers remained on the lookout.
Japanese March consumer price index data showed prices climbing at their quickest pace in more than two years; nevertheless, this increase was fueled by energy, confirming BoJ Governor Kuroda's view that this is cost-push inflation (not demand-pull). As a result, it is doubtful that the BoJ will alter its stance in the foreseeable future (unless it explicitly wants JPY to strengthen). Additionally, the MoF is unlikely to intervene at these levels, especially in light of the BoJ's reaffirmation of its commitment to the YCC.
It's difficult to choose a top. However, if the PBoC becomes uneasy with the pace of the shift, some participants may withdraw. Indeed, this could be a tangled downward correction. Profit-taking occurred when we approached 6.55.
However, none of the grounds you would use to justify this move upward in USDCNH differ from what the market has been saying for months, which is why, strangely, everyone poured into this move last week, and it has thus far worked out.
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