Easing in China may lead to new covid infections and subsequent lockdowns.  The US housing market is weakening, potentially leading to lower long-term rates.  Stocks staged a fierce correction and may be ready to fall. USD/JPY bearish – the broader trend is to the downside, and the most recent rise may prove to be a selling opportunity. Why? *Note: This content first appeared as an answer to a Premium user. Sign up and get unfettered access to our analysts and exclusive content. 1) China has eased restrictions for residents in Beijing and factories in Shanghai, but that has come after covid cases dropped. For policymakers, recent developments only serve as a vindication for their zero covid policy. There would be fresh lockdowns when new cases appear – and with Omicron and its subvariants, contagion is high.  The yen tends to benefit in response to adverse news in China. Investors repatriate funds to Japan, undoing lending in cheap yen. That could happen again in response to the next flare up.  2) US housing weakness: Jumping to the other side of the Pacific, the US economy has recently shown signs of weakness, especially in the housing sector. Both pending and new home sales fell well below expectations in April, exposing softness. Have mortgage rates gone too far? That would imply a drop in long-term yields is coming, and that weighs on USD/JPY. Returns on 10-year Treasuries and the currency pair are well correlated.  3) Correction may end: Another factor in favor of further drops for USD/JPY is a resumption of the falls in US stock markets. American shares have staged a massive comeback, breaking a long losing streak. However, they could resume their decline without any fresh optimistic news. The "buy the dip" move may make way for a "sell the rally" response.  USD/JPY Technical Analysis Technically, USD/JPY is struggling to recapture the 4h-50 Simple Moving Average (SMA) while the 100-SMA is breaking below the 200-SMA, another bearish sign.  Support is at 126.90, which was a low point in recent days, and then 126.35, the monthly low in May. Even lower, noteworthy support is only at 125. Resistance is at 127.60, which capped the pair in recent days and also served as support beforehand. 

Key highlights EUR/USD gained pace and surpassed the 1.0700 resistance. A major bullish trend line is forming with support near 1.0665 on the 4-hours chart. EUR/USD technical analysis Looking at the 4-hours chart, the pair gained pace above the 1.0700 level, the 100 simple moving average (red, 4-hours), and the 200 simple moving average (green, 4-hours). The bulls even pushed the pair above the 1.0750 resistance. On the upside, the bears might remain active near the 1.0800 level. A clear move above the 1.0800 level might push the pair further higher. The next major barrier could be 1.0920, above which EUR/USD could rally towards the 1.1000 level. If not, the pair might correct lower below 1.0720. On the downside, there is a major bullish trend line forming with support near 1.0665 on the same chart. A downside break below the trend line could send the pair towards the 1.0620 support. The next key support is near 1.0500.

The rally is back on after a strong week for equity markets. The main indices avoid an eighth straight down week. US market still has had one of its worst starts to the year in history. The week began with peak fear and ended with optimism high. Surely it can't be that easy to turn things around. But investor sentiment appears markedly improved after a week of promising earnings from the retail sector, coupled with some strong consumption data to end the week on Friday. Interest rate markets also took a noted doveish turn and now have taken down estimates for year-end interest rates by a full 25 bps. One week ago Fed funds futures were pricing in a 2.75-3% year-end rate. Now they are looking at 2.5-2.75% as the rate by December.  Source: CMEGroup.com That curious move enabled equities to breathe a little easier. The dovishness was perhaps added to on Friday with the Fed's favorite measure of inflation, the PCE, coming in as expected and showing a decline versus a month earlier. This welcome decline was seized upon by equity markets which pushed aggressively higher throughout the day. However we must urge caution, inflation is spreading its wings out into the full realm of the economy. This reduction was due to some high prior numbers dropping out of the calculation, such as used car prices. We are not so doveish based on one reading. We also think the Fed is unlikely to reverse course suddenly as Powell in his last missive promised pain for the equity market. The University of Michigan Sentiment Index has never been this low without a US recession. So consumers are depressed but spending money saved during covid lockdowns. That should give a short-term spending boost and we are already seeing strong booking from travel companies and airlines. But that may prove short-lived whereas inflation will likely outlast the spending splurge. In any event, the spending splurge won't exactly help inflation lower.  So let us get to the numbers for the week. The S&P 500 posted an impressive 5.8% gain for the week but the Nasdaq took the garlands with a comeback gain of 5.98%. The Dow was up 5.4%. All sectors were positive on the week with Financials (XLF) and Tech (XLK) the strong performers while Communications (XLC) was the laggard. Meme stocks made some noted gains with GameStop rising 43% on the week on talk of a short squeeze. Here we go again, but I don't think so. GameStop has earnings next week. A retail rally helped improve investor sentiment more broadly after Target and Walmart raised serious concerns last week over the economy and consumer spending. This week saw massive relief rallies from Dollar General, Dollar Tree, and Macy's while Costco limped behind. We had outlined such a likely rally after the bad news was fully priced in post Target and Walmart. Tesla and Twitter also made gains after Elon Musk is to increase his personal financing to $33.5 billion for the proposed Twitter deal. The saga could run and run however as the SEC is on the case over Elon's late filing. Regardless Tesla rallied strongly to close 7% higher at $733. During the week we published our deep dive on Tesla with a $400 price target. We included a DCF and relative valuation comparison, take a look here. Friday's rally needs to be put in the context of a number of positive factors. Firstly seven straight weeks of decline have only happened three times before in history, 1970, 1980 and 2001. So odds were in favor of a rally. Secondly, fund managers and hedge funds were very underweight equities. Thirdly it's a long weekend so squaring up is always common and fourthly sentiment indicators were terrible so a counter-trend rally was likely. So forgive us for not getting too excited just yet.  S&P 500 (SPY) technical outlook That brings us neatly to our technical overview. The SPY has rallied nicely up to our first resistance at $415. This really needs to break if this move is to be maintained. If not then expect new lows soon. But let us assume this rally is gaining strength, then a stretch to $435 is the real target. This could be choppy and a break up to $440 or even $445 would really confound the bears and stretch early bearish selling. Remember a lot of people were positioned or waiting for this rally. Many are looking to sell the rally and most of those sell orders will be at $435. The market is set up to stop many of them out by overstretching the rally to $445.  S&P 500 (SPY) chart, daily Earnings week ahead GameStop is the highlight for retail, meme traders. Not much else to get too excited about, earnings season is...

Summary So far in 2022, inflation has outpaced income, yet real consumer spending has increased every month this year including another 0.7% in April as we learned in today's personal income and spending report. The source of funds for these outlays are not infinite. For real spending to be sustained, we'll need to see income outpace inflation. That happened in April for the first time since October 2021. Consumers getting close to the end of the lollipop? On the day after revised GDP numbers showed an even faster pace of consumer spending in the first quarter, fresh data today for April showed that momentum continued into the second quarter. Personal spending shot up 0.9% in the month and, after adjusting for inflation, real spending still added 0.7%; that comes on the heels of revisions that more than doubled March's real spending gain from 0.2% to 0.5%. Spending was relatively broad-based with real services outlays growing another 0.5% and real goods spending up 1.0%. Goods spending got a lift from motor vehicles, the category with the largest increase on a real basis. Other durables categories, where frankly we have been expecting some weakness like recreational goods and vehicles and durable household equipment, also saw increased spending in April. Perhaps to some extent we are seeing the delayed arrival of stoves, dishwashers and other household durable goods items that have been in short supply these past few years. We have a tendency to discount survey data at least when it comes to the consumer. Sentiment has turned sharply lower in recent months with most consumers blaming inflation for their misery. It is hard to square that with recreational services posting the largest gain of any service category in real terms (+1.5%). Bars and restaurants also posted a solid 1.3% gain while grocery store spending was one of only two categories to post a decline in real spending during in April. The other was gas stations, which signals that consumers may be at least trying to combine trips to make fewer trips to the pump. Download The Full Economic Indicator

Europe It’s been a decent week of gains for markets in Europe, with the FTSE100 enjoying a particularly strong performance, on course for its best week in over two months. This outperformance has been helped by decent gains from the likes of Ocado, Kingfisher, B&M European Retail and Primark owner Associated British Foods, after yesterday’s fiscal stimulus package, took the pressure off UK consumer incomes with over £650 of help for the most vulnerable households, along with a £400 one-off payment to every homeowner. Having had a bit more time to dissect yesterday’s windfall tax announcement from the UK government we’ve seen further weakness in the UK oil and gas sector. While BP and Shell shares have held up quite well, they are still down today, after BP said it would review all of its investment in the UK and North Sea, which could well lead Shell to do the same thing. Earlier this year Shell submitted a new plan for its Jackdaw gas project with a delivery date in late 2025, after it was rejected last year. Could yesterday’s events prompt a reappraisal of that, even if it gets approved?    The smaller UK oil and gas companies have been hit the hardest given they earn all of their revenue in the UK, and their shares are down hard, not only today, but this week as well. Harbour Energy, which was formed out of the wreckage of Premier Oil and Chrysaor in April last year, and whose shareholders have had a torrid time over the past 5 years, is the worst performer on the FTSE100, but we’ve also seen EnQuest and Serica Energy slide back as well, given that the majority, if not all of their revenue, comes from the North Sea We’re also seeing weakness in the UK grid and power suppliers over concerns they could be next in line for some form of levy, with SSE, Centrica and National Grid all falling back for the second day in a row, and down on the week.   US US markets have opened higher today as they look to complete their first positive week since early April, in a welcome respite for battered dip buyers. The latest US PCE inflation data which the Federal Reserve uses to measure underlying inflation saw a decline in April, from 5.2% to 4.9%. Also, encouragingly the latest US personal spending data showed that US consumers were still inclined to spend money with a rise of 0.9%, which was slightly higher than markets had been expecting. With US consumers still looking fairly resilient we can safely conclude despite some of the earnings misses being seen by US retailers that money is still being spent, however it appears to be being spent in different parts of US retail as consumers become more cost conscious. We’ve seen downside surprises in the likes of Walmart and Target, yet Dollar Tree and Dollar General have surprised to the upside. Staying on the retail theme, GAP shares have plunged after reporting a bigger than expected loss in Q1. The retailer who owns the Old Navy and Banana Republic brands also downgraded their full year outlook for profits from $1.95c a share to between $0.40c and $0.70c a share. Its Old Navy It was a similar story for American Eagle Outfitters which have also slid sharply after its quarterly and revenue numbers came in light. It’s been a classic case of withdrawal symptoms for cannabis company Canopy Growth after it missed on revenues, as well as posting a bigger than expected loss in its Q4 numbers. Revenue came in at C$111.8m well below expectations of C$131.6m while losses narrowed from last year, but not by as much as the market had hoped, coming in at -C$121.8m. FX The US dollar looks set for its second successive weekly decline in line with weaker US treasury yields, which appear to be driving this recent weakness. The recent weakness appears to be being attributed to markets pricing out some of the more aggressive rate hiking scenarios. While that may be true, and there’s little evidence of that, it appears more likely that the greenback is losing ground as traders’ price the prospect of more aggressive tightening from the likes of the European Central Bank, the Bank of England and other central banks. There’s also the old favourite of good old fashion profit taking. This week’s windfall tax inspired fiscal stimulus has also given the pound a boost as markets price in more rate hikes from the Bank of England in the coming months. Commodities Brent crude and US oil prices hit their highest levels in two months today, as lower inventories spark a rush for new capacity, with the Biden administration looking to try and persuade its domestic oil industry to reopen closed...

The Canadian dollar hasn’t made any spectacular daily gains since May 13th, when it shot up 1.1%. The currency has, however, made slow but steady progress against its US cousin. Earlier today, USD/CAD touched a low of 1.2731, its lowest level in three weeks. Canada Retail Sales jump in Q1 Canada’s retail sales for March helped the Canadian dollar rally on Thursday. The headline figure was virtually unchanged, but core retail sales rose 1.5%. According to StatsCan, retail sales jumped 3.0% in Q1, its highest level since Q3 2020. Consumers continue to spend despite red-hot inflation, but if consumers decide to tighten the purse strings, the economy would likely take a hit and drag the Canadian dollar lower. The US dollar finds itself under pressure as risk appetite has rebounded. Investors were pleased with the FOMC minutes, as the Fed signalled that it planned to press ahead with 50-bps rate increases in June and July, which soothed concerns about a possible massive 75-bps hike. This gave the equity markets a boost and sent the greenback lower. The US economy may not be in a recession, but negative growth in the first quarter is certainly a concern. Second-estimate GDP came in at -1.5% QoQ, shy of the estimate of -1.3% and revised downwards from the initial estimate of -1.4%. Growth in Q1 was hampered by a surge in Omicron as well as the Ukraine war. One bright spot was solid consumer spending, which remains strong in the face of spiralling inflation. Consumer spending, as gauged by PCE expenditures, rose 3.1% in Q1, up from 2.7% prior. The markets are keeping a close eye on Personal Spending and Personal Income, which will be released later today. The economy is expected to rebound in Q2, but could be much lower than the rosy GDP numbers we saw after the US economy reopened. USD/CAD technical There is resistance at 1.2866 and 1.2955. USD/CAD is testing support at 1.2750. Below, there is support at 1.2661.