So, what do we know?
(A forex, index, and commodity market review)
Global equities had a mixed week with concerns over persistent inflation still at the forefront of central bankers thought. US inflation however beat consensus forecasts with a fall to 4.9% in April as the effects of the Federal Reserve’s rapid tightening last year has pushed the annual inflation rate back down from the 9.1% level hit last August.
Weekly change (amount change and percentage change on the week)
FTSE -23 -0.31%
DAX -47 -0.30%
DOW -373 -1.10%
S&P -12 -0.29%
NASDQ +49 +0.40%
NIKKEI +230 +0.79%
Hang Seng -422 -2.10%
US equities tracked sideways last week with the broad S&P500 slightly lower. However, the NASDAQ, which has been performing better than the broad market, tacked on a modest gain as the mood in the tech sector remains more positive following better-than-expected Q1 results.
The US inflation data was well received by markets although there remains a lot of uncertainty over the timing of any cut in official rates by the Federal Reserve.
The CME Fed Watch tool implies rates have peaked at their current level of 5% - 5.25% band with the market pricing in at least two cuts by year end to 4.25% - 4.5%. The Fed Watch tool is a minute-by-minute snapshot of what forward rates are saying about future Fed policy moves and remains very fluid. Jay Powell has made it very clear that he and other Fed officials consider the prosects of future cuts in interest rates to be very uncertain.
Here in the UK the Monetary Policy Committee delivered another increase in rates to 4.5% and warned the market that it would not hit its 2% inflation target until early 2025 rather than mid-2024. The BoE cited persistently strong food inflation which has pushed up overall inflation more than expected. Despite food costs moderating in other developed economies, the UK has suffered significant food inflation because of Brexit, transportation costs and exchange rates. Food inflation in March in the UK was at 19.1% whilst the average in the EU was 17.5%. Food inflation is expected to moderate from now on as low grain and energy prices feed through to lower shop prices.
The Bank now expects inflation to fall from 10.1% to 5.1% by Q4 this year, rather than the 3.9% previously forecast.
On the plus side the UK economy has faired better than the BoE (and IMF and OECD) has feared and will avoid a recession altogether this year with GDP expected to be 2.25% higher by mid-2026 than in Q1 this year. The downside of course has been further hikes in interest rates, which increases borrowing costs for consumers and businesses. Mortgage payments are now at the highest share of income since 2008 before the great recession. Financial markets now expect interest rates to peak at 5% later this year.
EURUSD -1.69 -1.53%
GBPUSD -1.84 -1.45%
USDJPY +0.92 +0.68%
The US Dollar registered its first significant gains since Mid-February. The move was profit taking inspired as traders cut some US Dollar shorts. Interest rate expectations were not likely to be the cause with the market now pricing in cuts of up to 0.75% by year end, although the level of uncertainty did not help Dollar shorts.
Sterling fell to the same extent as the Euro despite the Bank of England warning than inflation would not hit their target until early 2025 and with rates likely to peak at 5% to ensure inflation is tackled effectively.
Gold -5 -0.24%
UK OIL -1.12 -1.49%
US OIL -1.12 -1.57%
Gold managed to hold above the 2,000 despite the rebound in the US dollar.
Crude Oil fell back again last week as concerns over demand persist with rising Covid cases and lockdowns in parts of Asia. The strong US dollar will not be helping either and with a rise in US inventories suggesting oversupply in the US market.
What don’t we know….yet?
(What traders need to look out for in the week ahead)
A quiet week this week with no major central bank monetary policy meetings although several central bankers are speaking at various events which may be illuminating.
Monday
US Empire State manufacturing Index. A key measure of manufacturing in New York state. A pull-back in activity as the manufacturing continues to reel from the rapid rise in rates last year. Patchy.
Tuesday
UK Unemployment data. Another sign that economists missed that implied the UK economy was not as weak as most forecast. Claims edging higher.
Germany ZEW Economic Sentiment. On the up over the past three months but a modest dip below Zero expected.
US Core Retail sales (excludes vehicle sales). A choppy set of results so far this year as the US consumer remains cautious ahead of further Fed rate hikes.
Wednesday
UK Andrew Bailey speaking at British Chamber of Commerce. Any clues to MPC thinking re further rate rises might be helpful.
Thursday
EU National holiday throughout the most of EU in observance of Ascension Day. Main markets will remain open.
UK Monetary Policy Hearings – BoE Governor and committee members testify to parliament on inflation, monetary policy, and outlook for the UK economy.
US Philly Fed manufacturing Index. Like the New York survey, manufacturing in the Philadelphia region continues to struggle and with interest rates now at 5% the prospects for a short-term recovery look remote.
Friday
US Jay Powell speaking at panel discussion titled "Perspectives on Monetary Policy". The chairman of the Federal Reserve is far less certain about future rate cuts this year. Any clues to his thinking would help.
Eurozone The chair of the ECB pre-recorded speech for conference in San Paulo about high inflation and high indebtedness. Unlikely to impact our markets.
G7 Gathering of wealthy developed economies in Hiroshima, Japan. Ukraine war, China & Russia tensions, climate change, inflation, and other economic issues on the agenda. Ends on Sunday 21st.
What should we be trading?
(Analysis of the popular markets and what we like)
In this week’s podcast, we analyse the latest support and resistance levels for Gold, S&P500, UKOil, GBP/USD and EUR/USD. These markets have his some major levels in recent weeks, so we look for clues as to where these popular markets might move next.
What’s the problem?
(Examining a problem many traders face and what to do about it)
Trade sizing can often be a major problem for traders. We might all have heard of risking 1% of our account on each trade, but that does that mean and how do we calculate it. Adrian will explain all in today’s cast.
