Europe After the big losses of yesterday, as well as this week, European markets have tried to muster a semblance of a rebound as we head into the weekend, but are struggling to gain any sort of foothold, with a slide in commodity prices weighing on the FTSE100, with copper prices sliding to their lowest levels this year, and oil prices on course for their first negative week since early May. Glencore shares are outperforming after reporting that it expects to make record profits from its commodity trading division, for the first half of this year. The mining company said it expects to see profits in excess of $3.2bn for H1, which is already on the top end of expectations, for the entire year. Even without a similarly strong H2 profits are set to exceed the levels seen over the whole of 2021 when the company saw profits of $3.7bn. The rest of the basic resource sector is under pressure on the weakness in copper prices, with Rio Tinto and Antofagasta under pressure, while the slide in crude oil prices is weighing on BP and Shell.   Today’s Q1 trading update from Tesco has elicited a fairly indifferent response, with the shares edging higher on the day. The UK’s number one food retailer kept its full year profits guidance unchanged, as UK like-for like sales fell sharply by -1.5%, much more than expected. Management was keen to stress that they were seeing early signs of changing customer behaviour, which suggests that customers are favouring lower margin own brand items over branded goods. On a broader level the performance from its Booker operation, as well as central Europe helped push total like for like sales up by 2% year to date to £13.57bn. US After a torrid week US markets are trying to rebound as we head into the weekend, although the upside progress is being tempered by concerns over a slowdown in the US economy against a backdrop of a more aggressive Federal Reserve. On the downside Adobe shares have slipped back despite the company beating expectations on both revenues and profits. Q2 revenues came in at $4.39bn, a rise of 14% year on year, while profits came in at $3.35c a share. The reason for the slide came with the forward guidance which saw Adobe cut its full year revenue view, with management citing a Q3 revenue forecast to $4.43bn below expectations of $4.52bn, and a full year forecast of $17.65bn, down from $17.9bn. The reason for the caution is an uncertain economic outlook combined with the withdrawal from Russia and Ukraine.   Energy shares are also lagging, on the back of a slide in oil prices with ConocoPhillips and Devon Energy under pressure.   FX The Japanese yen has seen a sharp decline after gaining sharply in the leadup to today’s Bank of Japan meeting after the central bank showed no inclination to deviate from its accommodative monetary policy. At his press conference Bank of Japan governor Kuroda said there was no plan to raise the ceiling on the 10-year yield range, keeping the central bank as a global outlier when it comes to monetary policy. The risk is that in keeping the yen weak, when the time comes to tighten policy, it may well take much longer than expected if inflation starts to run away. The Swiss franc has continued to gain as the fall out from yesterday’s surprise rate hike continues to reverberate through the FX markets, coming out as the best performer this week, second to the gain in the greenback, which is still up near to 20-year highs, and is having another move to the upside as we head into the weekend, up above 135.00 again against the yen. The Norwegian Krone has been the worst performer this week along with the Canadian dollar.     Commodities Crude oil prices look set to post their first weekly decline in over a month as weakness in equity markets weighs on the demand picture, against a backdrop of more aggressive central banks looking to tackle inflation by taking measures to slow demand. It’s been a bad week for gold prices, on course for its biggest weekly decline since early May, as a stronger US dollar and tighter monetary conditions push yields higher. The deterioration in equity markets is lending an element of late week support, however the rise in yields is also acting as a drag.  

While inflation continues to wreak havoc, gold is reluctant to respond. Will it finally change and the price of the yellow metal rise? The Fourth Horseman of the Apocalypse The end is nigh! There should be no doubt about it now, as more horsemen of the Apocalypse are coming (see the painting below). The first was Pestilence. Two years ago, the COVID-19 pandemic plunged the world into a Great Lockdown and the deepest recession since the Great Depression. At the end of February 2022, the Russian troops brought War and Death to the Ukraine. Also, say hello to Famine, another horseman. To be clear, I don’t mean ‘hunger’ in the United States or other developed countries (although people in besieged Mariupol are running out of drinking water and food), but rather dearth and dearness. In other words: inflation. It doesn’t look very optimistic, indeed. As you can see in the chart below, the annual CPI rate has accelerated from 0.2% in May 2020 to over 8.0% in March and April 2022. Importantly, the core CPI, which excludes food and energy prices, has also surged recently, rallying from 1.25% two years ago to above 6.0% now. That’s a really high increase in the cost of living that hit society, especially the poor. There are already reports that people are skipping meals or taking desperate measures to save on heating costs (e.g., they are making fires in houses or, in the UK, pensioners are riding buses to keep warm and save on heating). As the chart below shows, March’s reading was the largest since December 1981 for the overall CPI and since August 1982 for the core CPI, as the chart below shows. And inflation rates were already retreating then, while today they are still on a rise.. Inflation rates were already retreating then, while today they are still on the rise. Are they? Well, inflation numbers in April came in slightly lower than in March, so it’s possible that inflation has already peaked. However, the rate was still higher than the consensus estimate of 8.1%, and it may be just a temporary pullback, similar to the one we saw in the summer of 2021. Inflation was less red-hot because gasoline prices declined 6.1% in April, but they spiked again in May (see the chart below), which will contribute to the upcoming inflationary reading. Moreover, as the chart below shows, the shelter index, which is the largest component of the CPI, has been constantly rising (as well as the producer price index), so there is an ongoing upward pressure on prices. Additionally, widespread lockdowns and an economic slowdown in China would hit the global supply chains again, strengthening the inflationary forces. Last but not least, the private savings boosted by the pandemic are still elevated, so consumers have resources they can tap. Hence, high inflation is likely to stay with us for some time. For how long? This is a great question that everyone is asking right now. On the one hand, the pace of growth in the money supply has recently slowed down, as the chart below shows, which gives us some hope for normalization in inflation in the future. On the other hand, the pace still hasn’t returned to the pre-pandemic levels, so inflation won’t simply disappear. What’s more, there is still a huge overhang in the monetary ‘bathtub’ waiting to come out through the pipeline as inflation. You see, the broad money supply increased by about $6.4 trillion between February 2020 and March 2022, while the real GDP rose by just $2.5 trillion. In other words, the money supply surged far more that what could be absorbed by economic growth, and the rest of the newly created money must be accumulated by higher prices (and increased demand for money, but let’s not complicate things here). Hence, the decline in the inflation rate in April shouldn’t be viewed as the beginning of disinflation. Elevated inflation is likely to remain with us this year, and possibly also in 2023. Good News for Gold? What does it imply for the gold market? Theoretically, it should be great news, as gold usually shines during periods of high and accelerating inflation. However, “usually” does not mean “always”. As we all know, gold has failed to rise in tandem with the current inflation so far and has been unable to break free from the $2,000 level. As the chart below shows, the yellow metal has remained in a downward trend since March 2022, if not August 2020. One of the reasons for gold’s disappointing behavior is that rising inflation was accompanied by expectations of higher interest rates. Given the already hawkish stance of the Fed, prolonged inflation could only increase the Fed’s tightening cycle even more.. This is why the real interest rates have surged...

On the one-hour chart, GBP/USD is forming higher highs and higher lows after dropping to its two-year low at 1.19341. Moreover, buyers achieved gains above both the 50 and 200-exponential moving averages. Nonetheless, to ensure that the uptrend continues, it is imperative that the pair breaches Thursday's top at 1.24047. In the short term, the candlesticks' bodies are shortening, which implies positive momentum is waning as buying forces do not seem strong enough to end on a higher note. In light of that, we shouldn't be surprised if the price consolidates around the 200-EMA for some time until we get a better indication of the market's direction. A sustained rally for the pound should lead to the price going higher than its previous high, resulting in a larger candlestick body. If that is the case, the pair may go higher to test the 1.24047 resistance level. Assuming the price moves above this roadblock for a sustained period, the next hurdle would be 1.24700. Alternatively, suppose price consolidation leads to an increase in selling pressure. The price can then make its way back down towards the 1.22507 support, which coincides with the 50-EMA. When this confluence breaks, the short-term uptrend will reverse, and more sellers will enter the market, dragging the pair to the 1.22061 level. Momentum oscillators reflect a fading bullish bias. RSI is moving away from the buying region into the neutral zone, suggesting buyers are giving up. Moreover, momentum is receding from its recent peak, pointing down towards the 100-threshold. Similarly, the MACD bars are decreasing in positive territory below the falling signal line.

Summary United States: Recession Risks Rise Last week's stronger-than-expected CPI print laid the groundwork for this week, sending markets into a churn and raising the risks of recession. We now look for the U.S. economy to experience a mild contraction in mid-2023. Economic data released this week add to evidence that the chances of a soft landing are fading. Next week: Existing Home Sales (Tues), New Home Sales (Fri) International: Bank of England Raises Rates by 25 bps as Growth Unexpectedly Contracts The outlook for the U.K. economy may be starting to cloud, as the economy saw an unexpected contraction, with GDP falling 0.3% month-over-month in April. Against a backdrop of slowing growth and high inflation, the BoE delivered a 25 bps rate hike at its June monetary policy meeting, bringing the Bank Rate to 1.25%. Next week: Canada CPI (Wed), U.K. CPI & PMIs (Wed/Thurs), Eurozone PMIs (Thurs) Interest Rate Watch: Treasuries Tumble as Yields React to CPI, Fed New economic data and aggressive Federal Reserve actions sent Treasury yields up sharply this week.Monday, in particular, was one of the most volatile days of the year for bond markets as yields spiked roughly 30 bps across most parts of the Treasury curve. Topic of the Week: So What's Happening with Our Old Friend Supply Chains? There is still ample backlog to be chipping away at, but overall things tend to be gradually improving on the supply front. That doesn't mean we are out of the woods yet, as there are still mentions of supply chain disruptions among many industries, particularly in reference to lockdowns in China. Download the full report

I think we've all earned a weekend break in the sun after a quite extraordinary week in the markets that saw plenty of central bank action, even from those not scheduled to meet. Stock markets are ending the week on a positive note, not that anyone is getting carried away with today's price action after turbulent trading conditions in recent days. Triple witching may also be a factor in today's moves which is another reason not to get excited. Recessions are increasingly likely as central banks race to dramatically raise rates before inflation spirals out of control. It is better than the alternative though; stagflation. A term that's been thrown around way too much in recent months which perhaps highlights the trepidation around it. We are not in a stagflationary environment, nor will we be later this year. But the risk of one is rising which is why central banks are becoming increasingly accepting of their actions tipping the economy into recession. There are a few exceptions, obviously. The Bank of Japan doesn't have an inflation problem; in fact, it's just about hitting its target thanks to high energy costs and that won't last. Its issue is a result of everyone else's inflation problem, with the BoJ being forced to buy huge amounts of bonds on a daily basis as part of its yield curve control (YCC) tool. Although on Friday it received no bids which may bring some short-term reprieve. The central bank remains committed to its YCC despite the pressure its ceiling has come under in recent weeks and the impact it's had on the currency. Barring a sudden SNB-style u-turn, it would appear the BoJ is not even entertaining the idea of throwing in the towel. Pressure will continue to mount in the weeks and months ahead but FX market intervention is likely to come before the BoJ abandons its YCC policy. Oil steady as European gas prices surge Oil prices are relatively steady at the end of the week, just shy of $120. Despite the correction over the last week or so, the market remains extremely tight and the price risks still remain tilted to the upside. With OPEC+ now reportedly missing output targets by 2.7 million barrels per day and setting unachievable targets for the summer, that gap will widen. The pressure in the market isn't going to ease any time soon. Gas prices in Europe on the other hand have been surging as Russia once again appears to weaponise supplies to Germany and Italy, which remain heavily reliant on it. Both are complying with the rouble payment demands and yet seen their flows hit heavily, with Gazprom blaming repairs as being behind the drop-off. It comes as both countries attempt to fill up reserves ahead of the winter which some suggest is no coincidence. Gold struggles after a brief recovery Gold has had a good run over the last couple of days as central banks have played catchup with the Fed, lifting their currencies and weakening the dollar in the process. US yields easing off their highs have also contributed to the greenback paring gains. The dollar remains king though and we're very much seeing that today with it trading almost 1% higher which has forced gold back below $1,850. No doubt volatility is going nowhere with central banks now in panic mode and every piece of data being poured over for further signs of stubborn inflation and economic vulnerability. From bad to worse for Bitcoin Bitcoin is showing some resilience around $20,000 which is being touted as a massive level. A break of it could be disastrous for bitcoin and the broader cryptocurrency space which would likely track it lower. How much longer can it hold? The constant flow of negative headlines - Celsius, Binance - in the current environment has been devastating for cryptos and now reports of Three Arrows Capital failing to make margin calls could lead to others surfacing in the coming weeks, spreading further negativity. It could get much worse before it gets better.

S&P 500 finally enters official bear market territory. Equities swing wildly after Fed hikes by 75 basis points. Does the Bank of Japan open the door to H2's best trading opportunity? The weeks keep on racking up and so too do the nerves of investors who are kept on the rack by the latest developments. Let us just have a quick recap and see where we might go from here. We entered the week in nervous territory but for the most part, expecting a 50 basis point hike from the Fed. This had been well telegraphed and despite last Friday's shock CPI print most felt 50 was the way forward. However, we then got word via the WSJ that 75 basis points were the tonic required and the markets headed for the exit doors. The worst fears were confirmed on Wednesday when the Fed did indeed hike by 75 basis points, the first rise of such magnitude since 1994. Most of us were not in the market to remember the last time and so perhaps that explains our bizarre reaction to what patently is bad news. The main indices went on a relief rampage with the Nasdaq nearly up 5% at one stage and the other main indices all up over 3%. A relief rampage from what exactly? Well, the narrative was that the Fed was stepping up to the plate, finally and it would tame inflation and ensure a soft landing. Reality swiftly set in on Thursday and risk assets dumped sharply. We have pointed out numerous times now that the Fed has a truly terrible record in ever engineering a soft landing. This is the Fed of irrational exuberance and pandemic printing. Inflation was always going to uncork once the pandemic lockdowns ended and we had too many consumers chasing to make up for lost time and too few goods to sate them. The initial Fed response may have been appropriate but the gorging on bond markets and Fed printing has created the massive bubble that we are now in the middle of deflating. Debt issuance went through the roof and most of it was of the junk variety. Investors were encouraged to buy junk and if you buy junk then you should expect junk in return. That is what many bond investors will now be finding out, now that the Fed has pulled the rug out from the credit markets. High yield spreads are surging, mortgage-backed securities (MBS) had no bids last week at one stage and junk bond issuance has fallen off a cliff.  JNK ETF High Yield Junk Bond ETF Price. The macro environment continues to worsen. We have touched on this before but we have University of Michigan Sentiment at decade lows, falling retail sales, falling savings rates, and increasing credit card debt. Inflation remains out of control and so really risk assets have only had one option for 2022. The increasingly obvious question is how long does this last and when will we bottom out? Again a bit of repetition to readers from our daily SPY post but the last leg to go will be earnings. It always is the last leg to go as markets are forward-looking while earnings are historical. But next quarter's earnings are not too far away now and we expect a significantly bearish tone from CEO's and CFO's. CEO speech turned bearish last quarter and it appears they have been putting their money where their mouth was in the last quarter. Insider selling has picked up markedly this quarter.  But average EPS forecasts for 2023 remain way too high. Notice from below how 2022 and 2023 EPS estimates for the S&P 500 are still being upgraded. Upgraded I hear you scream incredulously. Indeed these Wall Street analysts are an optimistic bunch. This upcoming quarter will see reality set in and earnings estimates will be brought down. This naturally will bring the S&P 500 and other main indices down with it. The S&P 500 (SPX) is trading on 16 times forward earnings and 21 times trailing earnings. This is about the historical average but it tends to fall below its average in recessions and obviously above in periods of expansion or bubble such as 2021. At the end of 2021 the S&P 500 was trading on over 40 times earnings S&P 500 index (yellow) versus average EPS estimates (purple), source: Refinitiv. While EPS estimates appear way too high that is a function of analysts being uniformly optimistic and usually drinking the cool-aid from company executives. Thank you to Saxo for first bringing this to our attention but dividend futures on the other hand are not subject to analyst forecasts but are based on the investor community. Dividend futures for 2023 are already marking a decline in the expected future dividend...