Markets US equities fell sharply Wednesday, S&P down 4%, the most significant daily decline since June 2020. The weakness came as Target's quarterly earnings added fuel to the recession risk narrative, while the drop of US10 year yields down 10bps to 2.88% offered little support. And Oil settled at 2.3% lower on the day. Equities continue to be at the mercy of broader macro themes, with more hawkish comments from Fed Chair Jay Powell leading to a further move higher in front-end rates, which continues to prove problematic for risk. Medium-term, the Fed is likely to respond to any easing in financial conditions by ratcheting up the hawkish noises and, in effect, acting as a lid on the markets. And this should keep active money on the sidelines. The relief rally trap door sprung when the S& P 500 4000 pins snapped after Target's earnings results exacerbated some recession fears that continued the theme of rising inventories detailed by Walmart on Tuesday. And the broad-based sell-off absolutely hammered tech. Indeed, contagion from bellwether consumer earnings prints is sending stagflationary shockwaves through the market, and equities suffered another massive bout of indigestion after yesterday's Alka Seltzer moment. While rising inventories and higher inventory/sales ratios are not new, the big boxes now confirm recessionary worries and catalyze the severity of the sum of all stagflationary fears.    Oil The China reopening trade got blindsided by intense global recessionary impulses. It is a very volatile market, but there are enough reasons to suggest why traders are looking to sell in the current environment.  An actual recession is likely one of the few antagonists that can contain oil prices with a supply deficit. And as the procession to recession shortens, oil prices could continue to fall due to demand concerns. In addition to Venezuela barrels possibly coming to market offsetting the ongoing political fractious Libyan supply disruption, the EU sanctions package currently under discussion would likely legalize Russian supplies' status quo at least through the year and take pressure off the prompt contract.    Forex It was another busy day in G-10 FX with broad-based dollar demand across the spectrum, driven by a hawkish FED and safe-haven demand, which are two primary supportive channels for King Dollar.  Investors continue to evaluate the diverging approaches taken by central banks amid an inflation crisis. Federal Reserve Chair Jay Powell issued some hawkish comments on Tuesday about the possibility of raising the Fed Funds above neutral. At the same time, the Bank of England seems to have fallen behind the curve with its dovish approach, despite rampant inflation data emerging earlier Tuesday. But folks that trade for a living, not analyze currencies as a job, are looking to buy JPY, which suggests the worm is turning on USDJPY.    JPY Local investor interest in buying USDJPY in the Asian session saw the pair touch a high in the 129.50/60 zone, coinciding with highs in various JPY crosses. Since then, the pair has been heavy on rallies and opened the North America session near 129.00/10. This morning we open the Asia session at 128.30 as safe-haven demand is kicking in. The JPY looks attractive with the global economy on the precipice of recession. JPY is interesting as the rise in USDJPY YTD has opened an enormous value gap for what is typically perceived as a safe-haven currency. Historically FX hedges for massive risk-off scenarios suggest that the YEN provides an excellent firebreak to the recessionary flames, especially against a "stock down rates down" seismic shock or a market backdrop consistent with recessionary pricing.   GBP Besides the Brexit risk and the BoE as a reluctant rate hiker, domestic political risk never seems to leave the GBP spectrum. "Red Wall" Conservative members of parliament are planning to ask Chancellor Rishi Sunak to remove Andrew Bailey as governor of the Bank of England. It seems nigh on impossible this would succeed, but it reflects the political pressure being heaped on the BoE. Bailey is just two years into an eight-year term. Bailey has not helped himself, with comments such as predicting an "apocalyptic" rise in food prices earning him opprobrium from all corners. Questioning the ability of your top central banker cannot be suitable for the currency.    CHF USDCHF and CHF crosses continue to trade heavily, with little bounces, after SNB Chairman Jordan said the central bank is "ready to act if inflation strengthens."  There is no relief in the crosses after disappointing quarterly results from major retailers weighed on the broader markets.    Gold Gold is caught in the tug of war between recessionary safe-haven demand and do not fight the fed mode.  It is a tough market for gold investors, with stocks tanking and the street moving into a capitulatory sell-all frame of mind.  And even lower bond yields...

Australian wage growth stood at 2.4% YoY in the first quarter of the year. The unemployment rate is expected to have decreased to 3.9% in April from 4%. AUD/USD is trading between Fibonacci levels and is poised to resume its slump. Australia is set to report its April employment figures on Thursday, May 19. The country is expected to have added 30K positions in the month, while the unemployment rate is foreseen down to 3.9% from the current 4%. But could these numbers be enough to boost the aussie? The Reserve Bank of Australia has hiked the cash rate by 25 bps earlier this month, the first movement in over a decade. The decision was previously conditional on inflation but also on wage growth. The Minutes of the meeting released earlier in the week showed the Board noted that information on “wages over the preceding month had been consistent with more persistent inflationary pressures arising from limited spare capacity in the domestic economy.”   Disappointing wage growth Policymakers linked rate hikes to actual inflation remaining sustainably within the 2 to 3 per cent target range, and this was likely to require a faster rate of wages growth than had been experienced over the preceding years. However, The Australian Q1 Wage Price Index, released early on Wednesday, disappointed, rising only a modest 0.7% in the quarter while increasing at an annualized pace of 2.4%. The central bank was looking for the Wage Price Index to be around 3¾ per cent by the end of the forecast period, which would be the fastest pace since 2012. With that in mind, the softer pace of wage growth could put a brake on further rate hikes, regardless of strong job creation. All in all, a solid employment report could provide just temporary support to the local currency. AUD/USD possible scenarios Technically speaking, the daily chart for the AUD/USD pair shows that the risk is skewed to the downside. The pair is down for the day after peaking well below a bearish 20 SMA. Technical indicators, in the meantime, have pared their advances, turning flat within negative levels. The AUD/USD pair is trapped between Fibonacci levels, contained by the 50% retracement of the latest daily decline (measured between 0.7265 and 0.6828) at 0.7045. The 38.2% retracement at around 0.7000, meanwhile, is providing support. A break through any of these levels should lead to some directional strength, although a discouraging figure that results in a weaker AUD/USD would likely see a larger movement than that triggered by an upbeat report. A clear slide below the 0.7000 level could see the pair initially falling to 0.6960 and later towards the 0.6900 figure. On the other hand, an acceleration through 0.7045 could see the pair nearing the 0.7100 figure, where sellers will likely re-appear. 

Europe Having seen some strong gains yesterday, we’ve slipped back on the back of a loss of momentum after Fed chair Jay Powell’s comments last night that the Federal Reserve is determined to regain the initiative when it comes to reining in inflation. A record high for UK inflation hasn’t helped the mood with retailers suffering the worst effects of a 9% CPI print, with Ocado, JD Sports, Tesco and B&M European Retail all slipping back. The energy sector is helping to underpin the London market, with BP and Shell outperforming. Rolls-Royce shares have come back into favour suddenly, having slipped to 18-month lows earlier this month, the shares have risen back to their highest levels this month.   Commercial real estate British Land has seen its shares rise after reporting a significant improvement in its portfolio valuation and performance, as the return to the office gathers pace, and consumers get out and shop more. Occupancy rates rose to 96.5% from 94.1% Underlying profits rose to £251m. Fresh from returning £3.5bn to shareholders earlier this week, Aviva shares have edged higher after reporting a decent Q1 update. UK and Ireland sales rose 2%, to £8.4bn, with general insurance sales rising 5% to £2bn. The company said it was on target to deliver on its full year targets and dividends for the next two years. Burberry shares have slipped back despite reporting a 23% increase in full year revenue of £2.8bn, while adjusted operating profits rose by 38% to £523m. However, the company warned that its outlook for 2023 was highly dependent on a recovery in its Chinese markets which have suffered because of Covid restrictions and lockdowns.    Pub chain and All Bar One owner Mitchells and Butlers have slipped back a touch despite announcing it had returned to profit in its H1 numbers. Total revenues came in at £1.16bn while profits before tax came in at £57m.  Management expressed some caution about the outlook citing rising costs related to wages, food, and utilities. Darktrace shares have plunged after Chief Strategy Officer Nicole Egan was named in a fraud ruling relating to her role when she worked at Autonomy with Mike Lynch, who is currently fighting extradition to the US. Premier Foods, who make a range of products including Mr Kipling Cakes, Lyons, and McDougall’s flour products has seen its shares jump to the top of the FTSE250 after adjusted pre-tax profits come in ahead of expectations, at £128.5m, up on both 2020 and 2019 levels. This improvement came despite a fall in revenues of 3.6% to £900.5m. The dividend was also increased from 1p to 1.2p per share. The company kept full year guidance unchanged, while warning of the risks of higher input cost inflation.  US US markets opened sharply lower after yesterday’s comments from Fed chairman Jay Powell that the Federal Reserve won’t hesitate to tighten the rates ratchet beyond neutral, until there is clear evidence that inflation is under control. Powell’s tone appears to suggest that the Fed will run the risk of pushing the US economy into a recession given the buffer of an unemployment rate which is at multi year lows. Tech stocks are once again leading the way lower, acting as a drag on the Nasdaq 100. In a sign that US consumers are already prioritising their spending, yesterday we saw Walmart’s share price drop sharply after the retailer missed on profits, as well as cutting its Q2 profits guidance, largely due to the effect higher costs were having on its margins. Today it’s been the turn of Target, as they also posted a set of numbers which missed expectations. Q1 revenues were decent at $25.2bn, while comparable sales rose by 3.3%. On profits the picture was somewhat different, coming in below expectations at $2.19c a share. The consensus was $3.07c a share. Target said it expected operating margins for the year to slip back to 6%, down sharply from the previous 8% or higher, due to unexpectedly higher costs of fuel and freight, higher inventory costs, as well as higher wage costs. Netflix shares have also slipped back after the streaming company announced the loss of 150 jobs, after the last quarter’s surprise loss of 200k subscribers. FX The pound has slipped back after UK inflation on the CPI measure rose to a record high of 9% in April, which was slightly below expectations. The CPI first came in to being in 1989, changing over the years, before being officially published in 1997, and then going on to become the official inflation targeting measure of the Bank of England in December 2003, replacing RPIX. On the RPIX measure, inflation is at its highest level in 40 years. Nonetheless, a decent chunk of the rise in prices, just under half, was down to the...

Uncertainty about peak inflation in the US continues to support the dollar.  Beijing's zero covid policies add to the greenback's safe-haven appeal. Russia's ongoing war in Ukraine gives sterling an advantage over the euro. That advantage is undermined by relative certainty about the BOE's policies, differing from the ECB's.  EUR/USD and GBP/USD are set to extend their declines – and for good reasons. Where is the bottom? The low point for these currency pairs heavily depends on the Federal Reserve and the main question is: when will the dollar reach a top? *Note: This content first appeared as an answer to a Premium user. Sign up and get unfettered access to our analysts and exclusive content. US inflation has yet to peak The top is peak inflation, or better said: core inflation. Once prices of everything excluding volatile food and energy begin stabilizing, the high point in the Fed's tightening cycle would be seen. Currently, the greenback benefits from high uncertainty, which is compounded by other issues (see later).  The Core Consumer Price Index (Core CPI) read came out at 0.6% MoM in April, which is over 7% in annualized terms. The Fed's target is 2%. On a yearly basis, prices rose by 6.2% from April 2021 to the same month this year.  We would need to see at least two months of Core CPI at 0.2% or 0.3% tops in order to be able to say that the peak is behind us. If the rate of underlying price rises stabilizes at around 6-7%, we could call it "cresting" rather than having peaked, and that could slow the dollar's ascent. However, it is significantly different than seeing a peak in the rearview mirror. Cresting does not promise the end of the climbing. China's covid policies vs. economic reality The second factor driving the dollar higher is China's handling of covid outbreaks in Beijing and Shanghai. The Communist Party's zero covid policy has already taken a heavy economic toll, as the 11.1% YoY plunge in retail sales and the 2.9% drop in industrial production recorded in April. At some point, China would either have depressed the virus as it hopes or have abandoned its policy. At this point in time, any loosening is limited and uncertainty boosts the safe-haven dollar. Moreover, lower output by China's factories is adding to supply-chain issues and boosting inflation – fueling the Fed's tightening cycle. Chinese President Xi Jinping desires his covid zero policy to succeed ahead of the party's all-important Congress in October. He seeks to break with tradition and win a third term, riding on his management in battling the disease. However, if fighting this war costs him high unemployment – it has already climbed to 6.1%, worse than expected – he might have to change course.  While there is no change in Beijing's policies, the dollar would likely remain bid and both EUR/USD and GBP/USD would continue falling.  The war hurts Europe more than the UK  The third factor moving these currency pairs is the war. Russia's invasion of Ukraine has sent prices of oil and gas skyrocketing, hobbling the economies of both the eurozone and the UK. Ongoing hostilities weigh on both underlying currencies – but not equally. The euro has a disadvantage as Germany's industry heavily depends on Russian energy. It remains the locomotive of the currency bloc. While gas prices are an issue for British households, the UK economy is more dependent on services than energy-guzzling manufacturing.  An end to the war would boost both currencies, but it would be more beneficial to the euro than to the pound. While the war rages on, sterling has the upper hand over the euro, when it comes to the impact of hostilities.  ECB uncertainty vs. BOE relative certainty The fourth factor is monetary policy. This war-related advantage is currently more than erased by uncertainty about monetary policy.The Bank of England has raised rates to 1%, and has signaled that fears of recession would hold it back from considerable hikes. The pound has already taken a beating for the BOE's indications.  The European Central Bank has yet to increase borrowing costs, and it is hard to tell where it would stop. This uncertainty is positive for the euro in the short term. However, once the Frankfurt-based institution begins raising rates, concerns over a substantial downturn could hold it back. The ECB would follow the footsteps of the BOE, signaling a halt – without being able to raise interest rates significantly. The Frankfurt-based institution's current deposit rate is at -0.50%. The minus sign means commercial banks are penalized for parking money with the ECB.  Overall, the euro has an advantage over the pound in the short term due to uncertainty about the ECB's policies and significantly more certainty about the BOE's next moves. Once the ECB...

European stocks got off to a mixed start to the week yesterday, after a big decline in Chinese retail sales pointed to an economy that came to a crashing halt in April, as a result of widespread covid lockdowns and restrictions.   US markets also underwent a similarly mixed session, with another significant decline in the Nasdaq 100, while the Dow finished slightly higher. Investor concerns about a possible recession are contributing to a short-term bid in US treasuries, pulling yields down in the process, as well as a reluctance to build on the rebound seen at the end of last week. Against that backdrop today’s European open still looks to be a positive one, after Asia markets pushed higher on optimism over the easing of some covid restrictions in Hong Kong and Shanghai, as we look ahead to a day of significant economic data from the UK and US. It’s a big week for the UK economy starting with wages data today, CPI inflation for April tomorrow which is expected to hit a record high of 9.1%, and April retail sales on Friday that are likely to slow sharply, as a result of surging inflation. Earlier this month the Bank of England raised rates for the fourth meeting in succession, as well as warning of the effect rising prices were likely to have on the UK economy in the coming months. With inflation surging to 7% in March and set to rise to 9% tomorrow, it is more important than ever that wages try and least keep up, even if that’s not what policymakers want to see, as evidenced by Bank of England governor Andrew Bailey's rather misguided comments to the Treasury Select Committee yesterday. However, with energy bills soaring by 54% this month, and other related costs also increasing sharply while higher wages will help, they won’t fully offset the hit given they are already lagging behind headline inflation. The fact remains people are still getting poorer and as such demand is likely to be impacted. Today wages for the three months to March are expected to rise by 5.4% including bonuses, and 4.1% without. While this is welcome, wage growth is still trending at half of what people are experiencing in terms of the hit to their real incomes, although the April numbers should see a further significant pickup when they are released next month.    One silver lining is unemployment below pre-pandemic levels at 3.8%, and set to stay there, however that’s cold comfort even with vacancy levels of 1m+. In contrast to the UK economy, the US economy has seen a strong start to the year if its retail sales numbers are any guide, although its Q1 GDP numbers would beg to differ after showing a contraction in Q1 of -1.4%. In January consumer spending rebounded strongly, rising 4.9%, after a -1.9% decline in December. This was followed by a 0.8% gain in February and a 0.7% gain in March. Nonetheless there are some nagging doubts as to how much of this rebound is being driven by consumer credit after it surged again in March, rising to $52.4bn, from $37.7bn in February, with revolving credit rising by 21.4%. With interest rates soaring in the US, one has to question whether this sort of credit growth is sustainable. Expectations are for April retail sales to remain resilient and rise by 1%, however given weak consumer confidence there is a growing disconnect between the two, meaning we might see a downside surprise, given how prices have continued to rise.     EUR/USD – Currently holding above the 2017 lows at 1.0340 last week, but bias remains lower for a move towards parity. To stabilise we need to get back above the 1.0650 level to signal a move back towards 1.0820.    GBP/USD – Struggling to rally above 1.2300 after a marginal new low at 1.2155 last week, with the major support back at the 1.2000/1.1980 area. We need to see a recovery back above 1.2470 to open up the 1.2600 area. EUR/GBP – Found support at the 0.8470/80 area yesterday and need to recover back above 0.8530 to retarget the highs last week above 0.8600. Bias remains for a move lower towards 0.8420.   USD/JPY – Last week’s failure at the 131.35 area has the potential to see a move towards 126.80. If that holds then the 135.00 area target remains intact. A move below 126.80 targets the 123.00 area. FTSE 100 is expected to open 14 points higher at 7,478. DAX is expected to open 86 points higher at 14,050. CAC40 is expected to open 23 points higher at 6,370.

While US markets underwent their 6th successive weekly decline, markets in Europe managed to claw their way back into positive territory, helped in some part perhaps by the strength of the US dollar which pushed both the euro and the pound to their lowest levels since 2017 and 2020, respectively. US markets also appear more vulnerable given that of all three central banks, the Federal Reserve appears the more determined of all the others in driving inflation lower, with a strong US dollar helping it to achieve that very goal. It is true that pressure is increasing on the European Central Bank to raise rates by the summer, but anyone who thinks they will be able to raise them much above zero is probably deluding themselves. Even the Bank of England is facing a tricky balancing act when it comes to whether to impose further rate rises on a UK economy that appears to have ground to a halt. At the weekend, the UK central bank came under a fire of criticism from Conservative politicians on the Treasury Select Committee criticising it for being too slow to react to the sharp rise in inflationary pressures. It is certainly true that the Bank of England was slow to recognise the tsunami of price pressures coming this way, however they haven’t been unique in that, and to its credit it did finally start to react at the end of last year, well before the Federal Reserve. That being said, the Bank of England does have questions to answer, and when Governor Andrew Bailey sits down in front of the Treasury Select Committee later today, he will certainly need to give a better account of himself than he has so far when it comes to speaking to the media, about its slow response to this current bout of inflation. Beyond that the Bank of England also has questions about its behaviour over the last 15 years, when it was also under the stewardship of Bailey’s predecessor Mark Carney. The seeds of the current crisis of confidence in the Bank of England, and how monetary policy is conducted were sewn under Carney’s stewardship when on any number of occasions, the central bank failed to raise rates when necessary, and then also needlessly cut them again in the wake of the June 2016 Brexit vote, a move that exacerbated an unnecessary inflationary impulse on UK consumers, when it was clearly unwarranted.   For several years now the Bank of England has been gripped by an unnecessary groupthink which has paralysed its policymaking process and crowded out alternative points of view. Politicians didn’t have anything to say about that then when it might have made a difference, so let’s not pretend that their criticism now is anything other than an attempt to shift blame from their own failings when it comes to holding the central bank to account, and in particular Bailey’s predecessor Mark Carney. This week UK CPI looks set to hit the highest level since it came into existence in 1988, at 9.1%. While part of that is the central bank’s fault, it’s not been helped by the inexplicably foolish decision by the government to raise National Insurance tax rates, something the central bank has no control over. As far as this week is concerned, while last week’s Friday rebound was welcome, one can’t help feeling that it is no more than a bear market rally, particularly where US markets are concerned. The Nasdaq 100 is still down 24% year to date, the S&P500, down 15% and the DAX is down 11%, while the FTSE100 is flat on the year. The big test for markets in Europe this week will be whether we can hold onto the gains we saw on Thursday and Friday, given that central banks are in tightening mode, and this week’s economic data is unlikely to show much in the way of improvement in the short to medium term. This morning’s April retail sales and industrial production data from China are a case in point. Last week the April trade numbers showed a sharp fall in both imports and exports as transportation difficulties and port stoppages impacted the flow of goods and services, pointing to the significant disruption caused by China’s current covid policies. In March, retail sales in China declined by -3.5%, the first decline since July 2020 and the biggest decline since April 2020 when China was coming out of its first nationwide lockdown. Today’s April numbers showed another steep decline, sliding -11.1%, an even bigger decline than the -6.6% fall that was expected. Industrial production also slowed sharply, falling -2.9%, against an expectation of a small rise of 0.5%.    These numbers are unlikely to improve significantly in the coming months given that China is unlikely to alter...