Equities were weaker on Monday morning, with far east and Europe reacting to the sharp sell-off in US equities Friday night.
Macron has won the French Presidential election although by a smaller margin than last time. France is saved from the more extreme policies of le Pen, but Macron has a tough time ahead. After all only 27.8% voted for him in the first round.
In the holiday shortened week last week, markets had been generally holding ground. The news out of Ukraine does not get any better with the focus now on east Ukraine as Russia goes for the land grab. With a Russian oil embargo off the table for this year, following a damning report from the Bundesbank of the potential impact on the German economy, the oil market is left to focus on the real global economy.
Then last Friday the US equity markets suddenly woke up again to the threat of inflation. Jay Powell, the chairman of the Federal Reserve, said last Thursday “it is appropriate in my view to be moving a little more quickly”. This suggests that the Fed is likely to raise rates by 0.5% at its meeting in early May – something that the rate futures on the CME have forecast for some time now.
With inflation at a 40-year high it has been the opinion of many market observers that this should be the case. Along with all central bankers, the Federal Reserve is behind the curve and playing catch-up. Treasury secretary Janet Yellen, a past Fed chair, said it was likely that elevated inflation would last for “a while longer”… however long that means.
The problem for the Fed and other central bankers worldwide is that inflationary expectations are becoming baked-in or self-fulfilling. On Friday a gauge of marketing inflation, the US 10-Year break-even, jumped to 3.08%. So the market now expects inflation to average 3.08% over the next decade – that’s the highest level in 20 years. To put this in perspective the 10-Year Breakeven Inflation Rate was 2.33% on January 20th.
Review of last week’s key action
FTSE -95 -1.24% DOW -914 -2.635 S&P -160 -3.61% NASDQ -931 -6.76% DAX -22 -0.15% NIKKEI unch Hang Seng -879 -4.09%
Equity markets were knocked by the sell-off in US equities which started with Jay Powell’s interest rate comments on Thursday. On Friday US equities experienced their biggest daily fall of the year, with all major indices slumping. This had a knock-on effect in Europe and elsewhere although much of the fall continued after Europe shut Friday afternoon.
At the same time the US dollar was also on a march following Powell’s comments which partially cushioned Europe from some of the worst fall seen in US equities, especially the technology sector. The FTSE and Dax falls were modest in comparison to those seen in the US, where the Dow fell over 1,000 points on Friday. The gloom in the markets was made worse by the IMF’s growth forecasts for individual countries. The update from January to April made sombre reading with global growth slashed across the board.
EURUSD unch GBPUSD -2.23 -1.7% USDJPY +2.13 +1.68%
Forex markets had a busier week than expected with sterling slumping against the US Dollar. Poor retail sales released Friday was the culprit. As I discussed in this week’s Monday Market Insights video, sterling fell through the psychological 1.30 level for the first time since November 2020.
With a fall in retail sales of 1.4% month on month, the second fall in a row, economists now expect the Bank of England to scale back its plans to raise intertest rates as the economy struggles with the cost of living crisis.
The Euro was under pressure as well, touching the lowest level versus the USD since April 2020. Seems the Macron election victory has done little to bolster the Euro early Monday morning.
Gold -41 -2.08% UK OIL -2.8 -2.5% US OIL -4.95 -4.65% Bitcoin -842 -2.07%
Precious metals continue to struggle with the strong Dollar. You would think the global macro picture would be far more supportive of gold in these times, but Gold is not cheap to own. It doesn’t pay dividends, there are insurance and storage costs and now the opportunity-cost rises with every rise in interest rates. Oil continues to track equities which have woken up again to the threat of inflation. Russian oil embargo will not happen this year – until Europe can insulate itself from the effects of such action.
Data / events for the week ahead
Another important week for data this week, although its Q1 results that are the focus, rather than economic data releases. Bank of Japan policy meeting is the only key central bank meeting this week.
Germany German IFO business climate. Large survey of manufacturers and retailers. Gradually slipping over the past 8 months. More of the same expected.
US Core Durable goods. Excludes large ticket items such as planes. A rebound from last month’s surprising fall.
US CB Consumer confidence. A slight uptick but unlikely to amount to much with inflation getting uglier and rates rising in just over a week.
US Earnings Alphabet
US Earnings Meta
Japan Bank of Japan Policy Meeting. Still swimming against the tide. BoJ continues to maintain loose monetary policy. See that yen continue to slide.
US Advance GDP reading Q/Q. The first reading of GDP in Q1. Clearly slowing down as the twin effects of inflation and the war in Ukraine take their toll on economic growth.
US Earnings Amazon, Apple,
Friday US Core PCE price index. A favourite measure of inflation pressure used by the Federal reserve.
OK, so that rounds up what’s ahead this week.
For more on the current outlook for the pound sterling in the currency markets following the IMF downgrade, watch my short Monday Market Insights video here.
I hope you have a good week in the markets. Check out the live trading webinar dates on this page – sign up for your free session.