The equity rally ran out of steam on Friday as options-related selling hit. Momentum also stalled as investor sentiment moved to more neutral readings. Short covering also slowed the latest data showed. The equity rally ran out of steam on Friday with all main indices closing in the red. The S&P 500 finished down a little over 1% while the Nasdaq lost close to 2%. The major forces at play were a stall in recent short covering and equity purchases from fund managers and hedge funds as well as a shift in sentiment readings from overly bearish to neutral. The rally has led to some strong gains across the big tech space and investors began to once more reassess the valuations. Yields have remained pretty calm which helped the rally but bets were also removed following the release of the Fed minutes and upcoming symposium at Jackson Hole.  Oil prices have continued to remain under pressure as fears over a global slowdown weigh as well as a surprising large drag from US inventories last week. Bitcoin too came under pressure as the risk-off narrative hit one of the more speculative risk assets. Bitcoin fell 10% on Friday and is now down at $21,000.  As ever the will we won't we enter recession argument continues and this has fuelled the rally also, that of recession fatigue. Everyone was expecting it and waiting for it and positioned for it. Then we got some strong employment data and slowing CPI data and a dovish Fed. This meant a reversal was perfectly set up and so it ensued. Now, much of that has changed if the latest from Goldman Sachs Prime brokerage and JPMorgan is to be believed.

Macroeconomic indicators this week pointed to further headwinds for the global economy. In the US, the New York Empire Manufacturing Index slumped to -31.3 (from 11.1) in August, the lowest level since slump after the first Covid-19 lockdown. The sharp drop was driven by weaker current conditions, while the expectations index improved slightly. The current Empire level implies US Manufacturing PMI clearly below 50, in line with what the new orders index predicted already in July. Also in Europe, there were weak indicators with the German ZEW expectations diving further during August to the lowest level since October 2008. The ZEW signals further declines in PMI ahead and increasing recession risk in the German economy, which is also our base case for the second half of this year, see Research Germany - Zeitenwende, 25 July. Our forward looking macroeconomic model, Macroscope, this week also pointed to further weakening momentum in the global economy across regions over the next six months, 18 August. On the inflation front, UK CPI inflation surprised to the upside creeping above 10% in July. The UK is thereby joining the “club” of countries, mostly in Eastern Europe and emerging markets, with double digit inflation rate. We think this highlights the need for Bank of England (BoE) to continue to frontload rate hikes, although a looming recession may curtail its hiking intentions into next year. The EUR/GBP cross initially moved lower on the back of the print, but later rebounded amid weak global risk sentiment. Another central bank that is upping its policy rate hikes is Norges Bank, which yesterday as expected carried out a 50bps rate hike. The move comes after the upward inflation surprise in July. The central bank dropped its specific forward guidance for the September meeting, just indicating that the policy rate “will most likely be raised further in September”. We expect the Bank to raise its policy rate at that meeting by 25bps against market expectation of a bigger 50bps move. In financial markets the clear winner was the USD while both equity markets and rates markets traded mostly sideways. We published our new FX Forecast Update this week, FX Forecast Update - USD to shrug off recession fears, 17 August, and see USD strength continuing with EUR/USD falling below parity over the next 12M due to Europe suffering from an energy related negative terms of trade shock and further tightening of global financial conditions. Looking into next week, a key focus will be August flash PMIs out in most western economies on Tuesday. In Europe, further declines – as also signaled by ZEW – will probably be in store, as the energy crisis is taking its toll on demand in manufacturing and services and recession fears are rising. In the US, lower gasoline prices and rebound in real incomes may support service sector demand. Look also out for the US personal expenditure data on Friday. The Jackson Hole Symposium will take place from Thursday until Saturday. Here Federal Reserve officials may outline their view on monetary policy amid a weakening economy. Download The Full Weekly Focus

Daily market outlook on major Update Time: 19 Aug 2022 09:30GMT. USD/JPY - 136.51 Dollar's intra-day rally in tandem with U.S. yields to a 2-week high of 135.49 in New York suggests re-test of Aug's 135.57 high would be forthcoming next, above would extend upmove from Aug's 130.41 7-week trough at 130.41 towards 135.96 before prospect of decline later. On the downside, only a daily close below 134.68 would prolong choppy swings and risk weakness towards 134.43, break would head to 133.92/97. Data to be released on Friday U.K. Gfk consumer confidence, Germany producer prices, U.K. PSNB GBP, PSNCR GBP, retail sales, Swiss industrial production, EU current account. Canada retail sales.

The Canadian dollar is lower for a third straight day. In the European session, USD/CAD is trading at 1.2984, up 0.29% on the day. Markets brace for soft Canadian Retail Sales The US dollar has rebounded this week against the majors, including the Canadian dollar. USD/CAD is on the verge of breaking above the 1.30 line, which has held firm since July 18th. A weak Canadian retail sales report later today could send the Canadian dollar into 130-territory. Retail sales for July is expected to slow to 0.3% MoM, down sharply from the 2.2% gain in June. Core retail sales is projected to drop to 0.9% MoM, down from 1.9%. Canadian consumers have been hit hard by the cost-of-living crisis, and a natural response has been to cut down on spending. This could prove a major headache for the economy, as domestic demand is a key driver of growth. Canada’s inflation has been heading toward double-digits, but as in the US, inflation dropped in July. Canada’s CPI slowed to 7.6% YoY, down from 8.1% in June, which marked a 40-year high. However, CPI common, a core CPI indicator, rose to 5.5% YoY in July, up from 5.3% in June. This is the Bank of Canada’s preferred gauge and means that the BoC, like the Fed, is not planning any U-turns in policy. We’ll have to wait for additional data to determine if headline inflation has peaked or whether the July release was a one-time blip. Even if inflation is easing, it is expected to fall very slowly, which means that consumers will feel the economic pain for some time to come. The BoC meets again next month, and the markets are expecting a 50 basis point increase, with a 25% of a 75bp hike. In July, the central bank surprised the markets with a super-size 100bp increase, the first G-7 country to deliver such a large rate hike in the post-Covid era. USD/CAD technical There is resistance at 1.3040 and 1.3131. USD/CAD has support at 1.2909 and 1.2818.

Following yesterday‘s weak rally and bonds showing, S&P 500 bears have the upper hand (timely announcement). Then, the crypto plunge is adding to downswing‘s credibility – about to spill over into tech. Note it didn‘t and doesn‘t take much of a dollar upswing – continuing the rise is enough. Yesterday‘s positive economic data are to be overshadowed by the Fed pronouncements sinking in. Yes, Daly, Kashkari spoke, even mentioning recession uncertainty… And it‘s clear we‘re likely to face quite some tightening ahead, more so than the markets are discounting – and any swift moves in inflation, are faciliated by economic contraction. The bull trap has been set. Next week won‘t be much better – I‘m looking for grim German PMIs Tuesday, challenged GDP readings on Thursday, and especially the hawkish Jackson Hole. It should be becoming increasingly clear that the risk-on rally is to meet serious reality check, and that lower stock (and other) market data are ahead. The sentiment of my Wednesday‘s recap of deteriorating economy, is to set the tone – and thankfully won‘t be as bad as the German persistently high PPI. Strong dollar to the rescue, a helpful tool in alleviating domestic inflation pressure in the States (yes, U.S. inflation peaked as I was advising you of in advance). To feel the daily pulse, let‘s move right into the charts – today‘s full scale article features good 6 ones. S&P 500 and Nasdaq Outlook S&P 500 bears have the initiative, and Nasdaq is likely to confirm that. Such a setup is where large downswings can be born – not guaranteed today, but quite possible. Credit Markets Fine picture in bonds for the bears – this weak daily pause is likely to give way to lower values. Tightening is putting pressure on inflation trades. Bitcoin and Ethereum The crypto break is finally here, presaging more trouble ahead still – putting to rest notions of Ethereum decoupling, at least relatively decoupling. Let the open profits grow!

Following yesterday‘s weak rally and bonds showing, S&P 500 bears have the upper hand (timely announcement). Then, the crypto plunge is adding to downswing‘s credibility – about to spill over into tech. Note it didn‘t and doesn‘t take much of a dollar upswing – continuing the rise is enough. Yesterday‘s positive economic data are to be overshadowed by the Fed pronouncements sinking in. Yes, Daly, Kashkari spoke, even mentioning recession uncertainty… And it‘s clear we‘re likely to face quite some tightening ahead, more so than the markets are discounting – and any swift moves in inflation, are faciliated by economic contraction. The bull trap has been set. Next week won‘t be much better – I‘m looking for grim German PMIs Tuesday, challenged GDP readings on Thursday, and especially the hawkish Jackson Hole. It should be becoming increasingly clear that the risk-on rally is to meet serious reality check, and that lower stock (and other) market data are ahead. The sentiment of my Wednesday‘s recap of deteriorating economy, is to set the tone – and thankfully won‘t be as bad as the German persistently high PPI. Strong dollar to the rescue, a helpful tool in alleviating domestic inflation pressure in the States (yes, U.S. inflation peaked as I was advising you of in advance). S&P 500 and Nasdaq outlook S&P 500 bears have the initiative, and Nasdaq is likely to confirm that. Such a setup is where large downswings can be born – not guaranteed today, but quite possible. Credit markets Fine picture in bonds for the bears – this weak daily pause is likely to give way to lower values. Tightening is putting pressure on inflation trades. Bitcoin and Ethereum The crypto break is finally here, presaging more trouble ahead still – putting to rest notions of Ethereum decoupling, at least relatively decoupling. Let the open profits grow!