Get our view why the end of the bear market may not be in sight, but the US -led stock market sell off could slow down. Does technical analysis even matter anymore? For the last 20 plus years, we could, with a bit of luck and central bank support, predict where markets would fall to on any given sell off. Take the financial crisis, or the global pandemic, when these major events pulled the rug out underneath global stock market bulls, the market tended to sell off quickly before being calmed down by an influx of multilateral central bank support led by the Federal Reserve. But the last two months have been epoch-shifting. Firstly, stocks and bonds have fallen side by side, the first time that they have done this in decades and US and global markets are in the midst of their longest sell off in years. The S&P 500 is down 19%, just above bear market territory, while big tech has fared worse, the Nasdaq is down more than 25% so far in 2022. Bonds have also taken a battering, the benchmark 10-year Treasury yield has fallen slightly, however, it remains at 2.78%, to put that move in perspective, 6-weeks ago this yield, which is usually stable, was trading at 1.75%. Bonds lose safe haven title  This is a major problem for the investment community. Usually during a stock market sell off the harbour in the storm has been bonds. However, during this sell off, all sectors of the S&P 500 are lower apart from the energy sector. Typically, one would not assume that energy would be the safest place to park your money. In the FX space, the yen has collapsed as a haven, the dollar is king and is now threatening parity with the euro. Rampant inflation, growth fears, a Fed intent on hiking interest rates and taming inflation regardless of the damage done to the global economy means that the dollar liquidity that we have become accustomed to is no longer there. The question now is, when will this sell off come to an end?  Why US stocks have ignored positive earnings surprises  We have mentioned above that technical analysis seems to be dead in the water right now, and instead it is important to look at fundamental analysis. We believe that financial markets will only calm down once there is a buffer to inflation. Either inflation must fall, or the market must be comfortable that sectors of the stock market can cope with high levels of inflation. Even positive earnings data hasn’t helped markets. To date, 95% of companies on the S&P 500 have reported Q1 earnings. Of those 95%, 75% of companies have reported earnings above their EPS estimate. However, companies that have reported earnings above their EPS estimate have seen a negative price reaction on average. If this persists, then it will mark the largest average negative price reaction to positive EPS surprises since Q2 2011, according to FactSet. For those 25% of companies that have posted negative EPS surprises, their share prices have seen a much larger negative reaction than average. FactSet uses the example of gym-wear firm Under Armour. It reported Q1 EPS at -$0.01 on May 6th. From May 4th – May 10th Under Armour’s stock price dropped more than 33%!  The reason for this reaction to the Q1 earnings season is twofold. Firstly, companies are beating their EPS estimates by a smaller margin than they have in recent quarters. Q1 2022 saw companies beat EPS estimates by 4.7% on average, below the 5-year average of 8.9%, according to FactSet. Added to this, companies and analysts have been more pessimistic in their outlooks for the rest of the year. 70% of the 88 S&P 500 companies that have issued forward guidance have issued negative guidance. Analysts have also cut EPS estimates for Q2 2022 by an average of 1%. This is only the second time in 8 quarters that analysts have cut EPS estimates on aggregate. Thus, the market sell off could be driven by future earnings expectations rather than what happened in Q1.  Why the path of least resistance means further downside  This gloomy backdrop suggests more selling is possible, however, the selloff could be stymied if Q2 earnings beat estimates and prove the analysts wrong. We will have to wait until the start of July to get that information. For now, we are waiting for some key fundamental reports to try and get some direction about the future path for markets. Sadly, for the bulls among us, the path of least resistance remains to the downside, and we do not think that this week’s economic data will shift the dial for the market mood. This means that we could see stocks continue to sell off, albeit at a slower...

S&P 500 recovers to the close as option expiry boosts stocks. S&P 500 is now though officially in a bear market.  Nasdaq closes in the red while Dow Jones Index is flat. Another wild and volatile week which seems to be the tone so far for 2022. Wild swings throughout the week were mirrored on Friday with wild intraday swings. The S&P 500 did manage to slide into a bear market territory on Friday. While there is no real official designation for a bear market the generally accepted consensus is that it's 20% from peak. The Nasdaq long ago meet this criterion but the S&P 500 has been flirting all week with the level. The job nearly looked to be done on Wednesday after Target (TGT) sounded alarm bells with its margin pressures and lowered guidance. Friday got the job done but with options expiry, in the afternoon the anticipated flows were always likely to see a late-session rally.  Next week sees more retailers lined up to report earnings and after Target and Walmart the bar has been set pretty low. This could set up a counter-rally with any sort of relief on earnings and or outlook likely to see a big move to the upside. Next week Costco (COST) Dollar Tree (DLTR) and Dollar General (DG) are the big earnings up.  Sentiment and positioning continue to suffer in the wake of recent volatility. The CNN Fear and Greed is at extreme lows. The American Association of Individual Investors (AAII) is at a recent low and the Investors Intelligence survey is also at lows not seen since the last rally post the Ukraine invasion. Back then we got a confusing rally but investors are slightly more attuned to the potential countertrend rally so that is perhaps the main reason we are not getting it! But next week sees corporate buybacks step up as earnings season ends. Also of note is hedge fund and mutual funds positioning being notably underweight equities. This will likely mean if we do get any sustained rally, the hedgies and fund managers will eventually rush into reposition and push it higher. Also worth noting is the latest Commitment of Traders report from the CME showing commercials are net long equities while speculators are short. Commercials are generally a better indicator although the correlation is not strong.  But now that we are in a bear market with the 20% intraday decline let's take a look at the stats. We are nearly 5 months in but the average bear market lasts just under 10 months and sees an average 38% fall. So looks like we are halfway there then in terms of time and percentage drop. Valuations would certainly point in this direction. The S&P 500 is still trading at nearly 20 times price to earnings, P/E ratio. This is historically high and indicative of a bull market. The right metric for a recession and or inflationary environment is nearer to 10! Over the past 140 years, the average P/E is 15 for US stocks. So definitely more room to the downside then.  SPY stock forecast So we are going with a short term rally up to perhaps $435. But we still face challenges in the long-term macro picture. Inflation looks like it is spreading and sticking. This is not yet anticipated by either the bond market or the equity market. A recession is now priced in by the bond market with long-end yields falling. But the front end is not pricing in an aggressive enough move in our view. We have recently had incredibly hawkish statements by the Bank of England saying inflation will hit double figures. Wholesale Prices (PPI) in Germany just increased by over 30% yearly. There is a lag between PPI flowing into CPI. Germany is not the USA but its economies do share distinct similarities. The inflation storm looks to be only starting. With US employment markets incredibly tight, wage demands will rise and will have to be met as employers are struggling to fill vacancies and keep existing staff. This is how inflation becomes entrenched. Eventually, demand destruction will set in. Now not only did Friday's intraday sell-off result in a 20% bear market decline. But it also hit the 38.2% retracement of the move from pandemic lows to the peak in January. The first resistance is at $415 and then $435. SPY chart daily Nasdaq (QQQ) forecast The Nasdaq chart looks even worse. Notice the big volume gap we are now in. This does not resolve until $200. Yikes. A quick short sharp rally may not be far away as both RSI and MFI look very close to oversold levels. But with inflation sticking around and the Fed having to fight then the Nasdaq outlook is decidedly grim. Nasdaq (QQQ) chart, daily Economic releases...

The converging forces of price inflation and economic contraction continue to weigh on asset markets.  The Dow Jones Industrials got clobbered by 1,000 points on Wednesday and is headed for its eighth weekly loss in a row. Meanwhile, precious metals markets are finally finding some footing. After declining for four straight weeks, gold and silver is advancing in this week’s trading.   Markets are experiencing big swings as new recession warnings are flashing. Big box retailers reported disappointing sales numbers this week while major investment banks downgraded their economic outlooks.  Analysts at Bank of America, Morgan Stanley, and Wells Fargo are warning of a looming recession and possible stock market crash.  Here’s commentary from financial advisor Steven Van Metre: Steven Van Metre: First it was Bank of America calling for a crash, now it's Morgan Stanley. Let's check this out. Well, Morgan Stanley warns ingredients for a global recession are on the table, and markets need to confront the possibility of an economic downturn. With inflation at the highest level in 40 years, the Federal Reserve taking increasingly aggressive action to cool consumer demand and prices, the risk of a global recession is on the rise, according to Morgan Stanley's economist. Now Wells Fargo is saying that a recession is unavoidable. Wells Fargo's CEO Charlie Scharf said Tuesday there was no question that the U.S. is headed for an economic downturn. The Federal Reserve has raised rates twice this year and plans to keep doing so, part of its bid to cool the economy and curb red-hot inflation. If the stock market and economy continue to deteriorate, then the Federal Reserve won’t be able to follow through with its ambitious rate hiking plans.  It may even have to reverse course and try to reliquefy the financial system should it suffer a hard landing.  Of course, Fed chairman Jay Powell assures us the economy remains strong. Just two weeks ago, we shared a quote of Powell claiming that nothing suggests the economy is close to or vulnerable to a recession. Some of America’s top economists and CEOs would beg to differ. So would millions of stock market investors who are seeing their portfolios shrink. And so would millions of Americans who are being forced to cut back on spending in order make ends meet. If a recession does in fact take hold in the months ahead, it wouldn’t be the first time the Fed has gotten its economic forecast completely wrong. Whether Powell actually believes the economy is still in good shape is another question. It’s possible he feels compelled to lie about it to try to avoid causing panic.  Regardless, savvy investors aren’t basing their decisions on pronouncements by officials. They are positioning themselves for both recession risk and inflation risk.   This could be the most difficult environment ever faced by any investor who didn’t live through the late 1970s stagflation period.  During stagflation, there are no safe havens in conventional financial markets. Stocks lose value as corporate profit margins get pinched. And bonds lose out to inflation.  Some investors will seek refuge in other asset classes such as real estate and cryptocurrencies. But the housing market now faces an affordability crisis thanks to rapid price increases and surging mortgage rates. By some measures, a median-priced home has never been less affordable versus household incomes.  Existing home sales have now declined for three months straight. Some analysts believe prices will have to come down as well. As for cryptos, that asset class in recent months has suffered a meltdown of over $1 trillion in value.  Last week, turmoil hit the so-called stable coin market when one heavily hyped coin turned out to be anything but stable. In a bizarre sequence of events, the supply of Terra and Luna tokens hyperinflated, causing their prices to crash. Some billionaires and hedge funds got caught up in the disaster. Bitcoin enthusiasts insist no such thing could happen to the largest and most well-known cryptocurrency. But at the end of the day, no digital asset can be guaranteed to retain its value over time. Hard assets that have intrinsic utility will always be worth something. But during a recession, economically sensitive commodities such as base metals and crude oil can suffer from demand destruction.     The hard assets least correlated to the economic cycle are precious metals. Demand for gold and silver often goes up during broader downturns as investors seek safe havens.  Although gold and silver have underperformed broad commodity indexes so far during this massive inflation run up, they will likely begin outperforming as the economy tanks and stagflation takes hold.

China’s overnight rate cut boosted sentiment, but investors remain nervous about diving back in to stocks after this week’s volatility. Stocks attempt to recover in final session “It has been another see-saw week in markets, as a rally in the first part of the week turned to dust in the second, but China’s rate cut has provided the rationale for a bounce in global stocks to round off the week. Although very much a lone voice crying in the wilderness, the PBoC’s move provided the fundamental basis for a rally in risk assets, reversing some of the mid-week gloom. But the surge in German factory-gate prices and a slump in UK consumer confidence shows that the broader backdrop continues to be quite negative for equities. With US markets already shedding initial gains, the picture remains uncertain.” Investor sentiment remains weak “Rally or not, investors are not exactly flooding back into equities. Instead, this will be a short-term bounce that may will use to get out at a better price. And given how quickly the bounce earlier in the week fizzled out, it is likely that caution is set to persist. Next week’s Fed minutes will remind markets that there is more to come from Powell and co, even if the BoE faces a trickier balancing act.”

UK stocks and the British pound rose on Friday after the surprisingly positive economic data from the country. According to the Office of National Statistics, the country’s retail sales rose by 1.4% in April after falling by 1.2% in the previous month. This increase led to a year-on-year decline of 4.9%, which was better than the median estimate of -7.2%. Excluding the volatile food and energy products, sales rose by 1.4%. Other numbers published this week showed that the country’s economy was doing well as the unemployment rate fell to the lowest level in decades. The Japanese yen retreated slightly against the US dollar after the relatively strong inflation data from Japan. The numbers revealed that the closely watched core inflation rose at the fastest pace in seven years. The figure rose to 2.1%, which was in line with what analysts were expecting. The weaker yen contributed to this inflation. Still, these numbers are significantly lower than in other countries. For example, in the US and UK, core inflation stands at over 6%. Therefore, with inflation above the BOJ target of 2%, there is a possibility that the BOJ will start tightening.  Global stocks were in the green on Friday as investors reacted to the latest stimulus in China. In a statement, the People’s Bank of China announced that it had cut its interest rate that underpins mortgage lending. As a result, banks cut the 5-year loan prime rate from 4.6% to 4.45%. This rate cut happened at a time when the Chinese economy is slowing. For example, data published this week revealed that industrial production, which is the main driver for the economy declined by 3%. Retail sales also declined sharply in April. USD/JPY The USDJPY pair rose slightly after the latest Japanese inflation data. It moved to a high of 127.91, which was slightly above this week’s low of 126.92. It has moved below the 25-day moving average and the important resistance at 129.43. The Relative Strength Index (RSI) and the momentum oscillator have tilted upwards. It has moved slightly below the descending trendline shown in blue. The pair will likely resume the downward trend as bears target the key support at 127. EUR/USD The EURUSD pair rose to a high of 1.0578, which is between the middle and upper side of the Bollinger Bands. It also moved slightly above the 25-day moving average. The Relative Strength Index (RSI) and the Commodity Channel Index (CCI) have pointed upwards. The pair will likely keep rising as bulls target the key resistance level at 1.06446. XBR/USD The XBRUSD pair rose after the latest China stimulus. It rose to a high of 110.63, which was slightly above the 25-day moving average. It is also approaching the important resistance level at 114.17, where it has struggled to move above in the past few days. The Stochastic Oscillator has moved slightly above the overbought level. It is also above the ascending trendline shown in blue. Therefore, the pair will likely keep rising.  

Energy The oil market has seen a partial recovery in early morning trading today, after Brent settled more than 2% lower yesterday. Reports that the US is looking to ease some sanctions against Venezuela contributed to yesterday’s weakness, with it thought that the easing could see a partial resumption of Venezuelan oil to Europe. Any increase is likely to be rather limited, at least in the short term. There are growing concerns over the refined products market. What started out as a tight middle distillate market appears to be spreading into the gasoline market, at least for the US. At a time when US gasoline inventories should be building ahead of the driving season, inventories instead have declined for most of this year. These are now below the low end of the 5-year range. Gasoline demand should only increase over the coming months and, in the absence of a pick up in refinery runs, the gasoline market is likely to continue to tighten. The tighter gasoline market appears to have also contributed to a narrowing in the WTI/Brent discount, given the need for higher US refinery runs, which should be supportive for US crude demand. Gasoline stocks in the ARA region of Europe are more comfortable, and are at least at a decade high for this time of the year. Given the tightness on the US East Coast and more comfortable European stock levels, we would expect to see a pick-up in European gasoline flows to the US East Coast in order to help alleviate some of this tightness. API numbers released overnight confirm the tightening in the market. US crude oil inventories are reported to have fallen by 2.4MMbbls, whilst stock levels at Cushing, the WTI delivery hub, fell by 3.1MMbbls. It was the gasoline market which saw the largest decline, with stocks falling by 5.1MMbbls over the last week. EIA numbers will be released later today. The EU carbon market saw some strength yesterday, with the market breaking above EUR91/t. The European Parliament’s Environmental Committee voted yesterday on reforms to the EU ETS. The committee agreed on the need for more aggressive carbon emission reduction targets. The committee would like to see emissions covered by the ETS fall by 67% by 2030 from 2005 levels, this compares to the initial proposal for a 61% reduction. In order to achieve this, the committee has recommended that the amount of emission allowances should be reduced by 4.2% in the first year the reform starts, and then this reduction should increase by 0.1% each year through until 2030. The committee also wants to see the phasing out of free allowances between 2026 and 2030, and the full implementation of the EU Carbon Border Adjustment Mechanism (CBAM) by 2030, which would be 5 years earlier than currently proposed. In addition, the Environmental Committee wants to phase out free allocations for the aviation sector by 2025, which would be 2 years earlier than the Commission had proposed. The proposal will also see maritime transport included in the ETS from 2024, which would cover 100% of intra-EU routes, and 50% of emissions from extra-EU routes coming in and out of the EU initially. Finally, the committee also agreed on the implementation of another emission trading system for commercial buildings and transport, which would start in 2025, whilst private buildings and transportation will be excluded from this new ETS until at least 2029. This latest proposal will be put to a vote in parliament next month, after which negotiations between member states will likely start. Metals Latest reports that Shanghai might start relaxing its two-month lockdown after three days of zero community transmission, along with better-than-expected retail sales and consumer spending data from the US, were constructive for risk assets yesterday. Most base metals settled higher on the day, with LME aluminium closing more than 2% up. Shrinking LME inventories have provided some support to aluminium. The latest LME data shows that on-warrant inventories for the metal fell for an eighth consecutive day to a new record low of 230kt yesterday. Turning to steel, and China Iron & Steel Association (CISA) said that China will keep its restrictions on new steel capacity intact and would push for more mergers and acquisitions within the industry. Due to ongoing Covid-related restrictions, steel demand has remained under pressure recently, but this should improve as the Covid situation improves. Mysteel expects China’s steel demand over 2H22 to rise by 10% compared to 1H22, whilst YoY growth is expected to hit 15% in 2H22. This growth is expected to be supported by local government policies. Agriculture CBOT wheat continued to trade firm yesterday, even after India relaxed its stance with its recently announced export ban on wheat. New directives from the Indian government indicate that the restrictions will not apply...