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Market Forecast
26/03/2022

Markets turn cautious ahead of the weekend

Overview: With the US warning about a "vertical escalation" by a stymied Moscow and the EU cautioning that Beijing may send semiconductors and other tech hardware to Russia, it is little wonder that risk appetites are being curtailed ahead of the weekend. Japan eked out a small gain, most of the major bourses in the Asia Pacific region were lower. Of note the Hang Seng's 2.4% fall left it virtually flat on the week. Europe's Stoxx 600 is flat after posting two consecutive losing sessions. US futures are narrowly mixed. Benchmark yields are a couple of basis points lower, putting the US 10-year around 2.36%. European yields are 2-4 bp softer. Following a firmer than expected Tokyo March CPI, the 10-year JGB yield rose to a new high, just shy of 0.24%. In the foreign exchange market, the cautious risk stance is evident with the yen and Swiss franc showing modest strength. An exception to the risk-off is the relative strength of emerging market currencies. The JP Morgan Emerging Market Currency Index is up for the fourth sessions to put the finishing touches on the second weekly advance. Turning to commodities, gold is consolidating above $1950 and is up about 2% this week. May WTI is off around 1.4% after falling 2.2% yesterday. Nevertheless, it is up about 7% this week. US natgas is softer, trying to snap a four-day advance. It was up almost 11% this week coming into today. Europe's natgas benchmark is more than 2% lower to pare this week's gain to about 6.5%. Iron ore rose 3.5% to recoup this week's loss. Copper is a little firmer to be flat on the week. The price of wheat is falling for a fourth session following a 5.2% rally to start the week. It is up less about 1% for the week. It had fallen around 12.3% in the previous two weeks. Asia Pacific Tokyo's CPI accelerated this month as the weaker yen and higher commodity prices fed through. The 1.3% headline increase was slightly stronger than expected. Excluding fresh food, the core measure edged up to 0.8% from 0.5%. Electricity, gas, and imported food lifted the core measure. Excluding fresh food and energy, the deflationary pressures slackened to -0.4% from -0.6%. Meanwhile, the 10-year JGB yield approached the 0.25% cap imposed by yield-curve control and a more active defense may be necessary next week. At the same time, Prime Minister Kishida has reportedly instructed the cabinet to put together a supplemental budget next week. China's Security Regulatory Commission is still apparently negotiating with the America's Public Company Accounting Oversight Board. Earlier this week, Chinese accounts made it seem that a deal was imminent that would allow mainland-based companies to remain listed on US exchanges. The issue are US laws that require audit reports to be made to authorities. Chinese authorities appear to make some concessions but wanted to withhold some "sensitive" data. If the US rules are flaunted for three years, the violator faces de-listing. That could begin in 2024. Reports suggest China has sent Russia 30k tons of alumina following Australia's ban that provided Russia's Rusal with 40% of its alumina supply. Another 30k tons are expected to follow quickly. The US and Europe have cautioned China against material support for Russia. However, officials say there is so far no evidence of Chinese assistance. The alumina deal is being cast as a commercial transaction rather than state sponsored. Meanwhile, China's lockdown this week of Tangshan (steel producing region) and Shandong (oil refineries) have knock-on effects that are disrupting the world's second-largest economy, with potential to further disrupt supply chains. The dollar is falling for the first time in six sessions. If the 0.66% pullback is sustained, it would be the largest loss since last November. Even with the decline, the greenback is up nearly 2% against the yen this week. The profit-taking began after the dollar had risen to almost JPY122.50 in North America yesterday. The pullback brings the dollar back to where it was in Tokyo on Thursday. Initial resistance is now seen near JPY122.00. The momentum readings are stretched, but the move does not seem complete. The Australian dollar set a new high for the year near $0.7535 before succumbing to some light profit-taking. It found support a little below $0.7500. Even with the pullback, it is the strongest of the major currencies this week, gaining almost 1.25%. The intraday technical indicators favor a recovery in North America. The US dollar slipped against the Chinese yuan for the second session but is still poised to extend its gain for the fourth consecutive week. The Chinese 10-year premium over the US narrowed by about 20 bp this week to 45 bp. The PBOC set the dollar's reference rate at CNY6.3739, a little above projections for...

Market Forecast
26/03/2022

Markets turn cautious ahead of the weekend

Overview: With the US warning about a "vertical escalation" by a stymied Moscow and the EU cautioning that Beijing may send semiconductors and other tech hardware to Russia, it is little wonder that risk appetites are being curtailed ahead of the weekend. Japan eked out a small gain, most of the major bourses in the Asia Pacific region were lower. Of note the Hang Seng's 2.4% fall left it virtually flat on the week. Europe's Stoxx 600 is flat after posting two consecutive losing sessions. US futures are narrowly mixed. Benchmark yields are a couple of basis points lower, putting the US 10-year around 2.36%. European yields are 2-4 bp softer. Following a firmer than expected Tokyo March CPI, the 10-year JGB yield rose to a new high, just shy of 0.24%. In the foreign exchange market, the cautious risk stance is evident with the yen and Swiss franc showing modest strength. An exception to the risk-off is the relative strength of emerging market currencies. The JP Morgan Emerging Market Currency Index is up for the fourth sessions to put the finishing touches on the second weekly advance. Turning to commodities, gold is consolidating above $1950 and is up about 2% this week. May WTI is off around 1.4% after falling 2.2% yesterday. Nevertheless, it is up about 7% this week. US natgas is softer, trying to snap a four-day advance. It was up almost 11% this week coming into today. Europe's natgas benchmark is more than 2% lower to pare this week's gain to about 6.5%. Iron ore rose 3.5% to recoup this week's loss. Copper is a little firmer to be flat on the week. The price of wheat is falling for a fourth session following a 5.2% rally to start the week. It is up less about 1% for the week. It had fallen around 12.3% in the previous two weeks. Asia Pacific Tokyo's CPI accelerated this month as the weaker yen and higher commodity prices fed through. The 1.3% headline increase was slightly stronger than expected. Excluding fresh food, the core measure edged up to 0.8% from 0.5%. Electricity, gas, and imported food lifted the core measure. Excluding fresh food and energy, the deflationary pressures slackened to -0.4% from -0.6%. Meanwhile, the 10-year JGB yield approached the 0.25% cap imposed by yield-curve control and a more active defense may be necessary next week. At the same time, Prime Minister Kishida has reportedly instructed the cabinet to put together a supplemental budget next week. China's Security Regulatory Commission is still apparently negotiating with the America's Public Company Accounting Oversight Board. Earlier this week, Chinese accounts made it seem that a deal was imminent that would allow mainland-based companies to remain listed on US exchanges. The issue are US laws that require audit reports to be made to authorities. Chinese authorities appear to make some concessions but wanted to withhold some "sensitive" data. If the US rules are flaunted for three years, the violator faces de-listing. That could begin in 2024. Reports suggest China has sent Russia 30k tons of alumina following Australia's ban that provided Russia's Rusal with 40% of its alumina supply. Another 30k tons are expected to follow quickly. The US and Europe have cautioned China against material support for Russia. However, officials say there is so far no evidence of Chinese assistance. The alumina deal is being cast as a commercial transaction rather than state sponsored. Meanwhile, China's lockdown this week of Tangshan (steel producing region) and Shandong (oil refineries) have knock-on effects that are disrupting the world's second-largest economy, with potential to further disrupt supply chains. The dollar is falling for the first time in six sessions. If the 0.66% pullback is sustained, it would be the largest loss since last November. Even with the decline, the greenback is up nearly 2% against the yen this week. The profit-taking began after the dollar had risen to almost JPY122.50 in North America yesterday. The pullback brings the dollar back to where it was in Tokyo on Thursday. Initial resistance is now seen near JPY122.00. The momentum readings are stretched, but the move does not seem complete. The Australian dollar set a new high for the year near $0.7535 before succumbing to some light profit-taking. It found support a little below $0.7500. Even with the pullback, it is the strongest of the major currencies this week, gaining almost 1.25%. The intraday technical indicators favor a recovery in North America. The US dollar slipped against the Chinese yuan for the second session but is still poised to extend its gain for the fourth consecutive week. The Chinese 10-year premium over the US narrowed by about 20 bp this week to 45 bp. The PBOC set the dollar's reference rate at CNY6.3739, a little above projections for...

Market Forecast
26/03/2022

Markets turn cautious ahead of the weekend

Overview: With the US warning about a "vertical escalation" by a stymied Moscow and the EU cautioning that Beijing may send semiconductors and other tech hardware to Russia, it is little wonder that risk appetites are being curtailed ahead of the weekend. Japan eked out a small gain, most of the major bourses in the Asia Pacific region were lower. Of note the Hang Seng's 2.4% fall left it virtually flat on the week. Europe's Stoxx 600 is flat after posting two consecutive losing sessions. US futures are narrowly mixed. Benchmark yields are a couple of basis points lower, putting the US 10-year around 2.36%. European yields are 2-4 bp softer. Following a firmer than expected Tokyo March CPI, the 10-year JGB yield rose to a new high, just shy of 0.24%. In the foreign exchange market, the cautious risk stance is evident with the yen and Swiss franc showing modest strength. An exception to the risk-off is the relative strength of emerging market currencies. The JP Morgan Emerging Market Currency Index is up for the fourth sessions to put the finishing touches on the second weekly advance. Turning to commodities, gold is consolidating above $1950 and is up about 2% this week. May WTI is off around 1.4% after falling 2.2% yesterday. Nevertheless, it is up about 7% this week. US natgas is softer, trying to snap a four-day advance. It was up almost 11% this week coming into today. Europe's natgas benchmark is more than 2% lower to pare this week's gain to about 6.5%. Iron ore rose 3.5% to recoup this week's loss. Copper is a little firmer to be flat on the week. The price of wheat is falling for a fourth session following a 5.2% rally to start the week. It is up less about 1% for the week. It had fallen around 12.3% in the previous two weeks. Asia Pacific Tokyo's CPI accelerated this month as the weaker yen and higher commodity prices fed through. The 1.3% headline increase was slightly stronger than expected. Excluding fresh food, the core measure edged up to 0.8% from 0.5%. Electricity, gas, and imported food lifted the core measure. Excluding fresh food and energy, the deflationary pressures slackened to -0.4% from -0.6%. Meanwhile, the 10-year JGB yield approached the 0.25% cap imposed by yield-curve control and a more active defense may be necessary next week. At the same time, Prime Minister Kishida has reportedly instructed the cabinet to put together a supplemental budget next week. China's Security Regulatory Commission is still apparently negotiating with the America's Public Company Accounting Oversight Board. Earlier this week, Chinese accounts made it seem that a deal was imminent that would allow mainland-based companies to remain listed on US exchanges. The issue are US laws that require audit reports to be made to authorities. Chinese authorities appear to make some concessions but wanted to withhold some "sensitive" data. If the US rules are flaunted for three years, the violator faces de-listing. That could begin in 2024. Reports suggest China has sent Russia 30k tons of alumina following Australia's ban that provided Russia's Rusal with 40% of its alumina supply. Another 30k tons are expected to follow quickly. The US and Europe have cautioned China against material support for Russia. However, officials say there is so far no evidence of Chinese assistance. The alumina deal is being cast as a commercial transaction rather than state sponsored. Meanwhile, China's lockdown this week of Tangshan (steel producing region) and Shandong (oil refineries) have knock-on effects that are disrupting the world's second-largest economy, with potential to further disrupt supply chains. The dollar is falling for the first time in six sessions. If the 0.66% pullback is sustained, it would be the largest loss since last November. Even with the decline, the greenback is up nearly 2% against the yen this week. The profit-taking began after the dollar had risen to almost JPY122.50 in North America yesterday. The pullback brings the dollar back to where it was in Tokyo on Thursday. Initial resistance is now seen near JPY122.00. The momentum readings are stretched, but the move does not seem complete. The Australian dollar set a new high for the year near $0.7535 before succumbing to some light profit-taking. It found support a little below $0.7500. Even with the pullback, it is the strongest of the major currencies this week, gaining almost 1.25%. The intraday technical indicators favor a recovery in North America. The US dollar slipped against the Chinese yuan for the second session but is still poised to extend its gain for the fourth consecutive week. The Chinese 10-year premium over the US narrowed by about 20 bp this week to 45 bp. The PBOC set the dollar's reference rate at CNY6.3739, a little above projections for...

Market Forecast
26/03/2022

Week Ahead: EUR/USD braces for US jobs and European inflation [Video]

The Fed keeps warning it will need to roll out the big guns in its battle against inflation. Traders have priced in faster rate increases to reflect this shift but the dollar hasn’t really benefited. Instead, it is the yen that has suffered. The coming week includes inflation stats from Europe and employment numbers from America, which combined could decide what’s next for euro/dollar. 

Market Forecast
26/03/2022

Weekly economic and financial commentary

United States: From factories to construction sites, supply shortages slow activity Economic reports this week for both manufacturing and homebuilding shared two main themes: disappointing headline numbers, but plenty of backlogs for future work. Whether it is new homes or durable goods, the biggest clog in the production pipeline continues to be supply shortages, and it is increasingly evident that no part of the economy is spared from their pernicious effects. Next week: Personal Income & Spending (Thurs), Employment (Fri), ISM Manufacturing (Fri). International: U.K inflation soars to a 30-year high In the context of elevated global price pressures, inflation in the United Kingdom is showing no signs of slowing down anytime soon. The February CPI surprised to the upside, rising 6.2% year-over-year, as higher prices for energy and commodities have started to reverberate throughout the economy to affect prices more broadly. Next week: China PMIs (Thurs), Japan Tankan Survey (Fri), Eurozone CPI (Fri). Interest rate watch: Interest rate volatility near a decade-high The roller coaster ride for U.S. interest rates continued this week. By at least one measure, interest rate volatility is currently well above its average over the past decade and is nearing the highs reached during the peak of the COVID crisis in March 2020. Credit market insights: Looking back at 2021 with the distributional financial accounts The Federal Reserve's Distributional Financial Accounts was released for the fourth quarter of 2021, giving us more information on the state of households across diverse segments of the American population. Across the socioeconomic spectrum, household balance sheets have been bolstered since the onset of the pandemic, with growth particularly concentrated at the lowest and highest ends of household wealth. Topic of the week: Prices keep pumping up at the pump Gas prices reached record highs during the first weeks of March, raising concerns about the potential implications for consumer spending. It's a predictable pivot, as a sudden price increase in a product that most households cannot do without has historically been associated with wilting consumer sentiment. Download The Full Weekly Economic & Financial Commentary

Market Forecast
25/03/2022

GBP/USD Outlook: Flag pattern favours bearish traders amid bets for bigger Fed rate hikes

GBP/USD witnessed selling for the second straight day on Thursday amid modest USD strength. The Fed’s hawkish outlook, elevated US bond yields continued acting as a tailwind for the buck. The risk-on impulse capped the USD and assisted the pair to find support ahead of mid-1.3100s. The GBP/USD pair extended the previous day's rejection slide from the 1.3300 mark, or a two-and-half-week high, and witnessed some selling for the second successive day on Thursday. The intraday downfall dragged spot prices to a two-day low and was sponsored by modest US dollar strength. A slew of influential FOMC members, including Fed Chair Jerome Powell, left the door open for a larger rise in borrowing costs to bring down unacceptably high inflation. The speculations were further fueled by surging crude oil prices, which should continue to put upward pressure on the already elevated consumer prices. This, in turn, pushed the yield on the benchmark 10-year US government bond back closer to the  22-month high touched earlier this week and underpinned the greenback. Meanwhile, tensions in Ukraine have shown no signs of de-escalating. This, along with the lack of progress in the Russia-Ukraine peace negotiations, further benefitted the safe-haven buck. On the other hand, the British pound was pressured by a dovish assessment of the Bank of England's view around the need for future rate hikes. Bulls failed to gain any respite from an unexpected rise in the UK Services PMI, which was offset by a larger drop in the gauge for the manufacturing sector. From the US, Durable Goods Orders fell short of market expectations, while the Weekly Initial Jobless Claims recorded a larger than anticipated fall during the week ended March 18. The mixed economic data did little to impress intraday traders or provide any meaningful impetus to the major. That said, the risk-on impulse in the financial markets capped gains for the greenback and assisted the pair to find some support just ahead of mid-1.3100s. Nevertheless, the pair finally settled with modest intraday losses, though managed to gain strong positive traction during the Asian session on Friday. It, however, remains to be seen if bulls are able to capitalize on the move amid the risk of a further escalation in tensions between Russia and the West. In fact, the Biden administration rolled out more sanctions against Russia, targeting individuals and entities in response to its invasion of Ukraine. Adding to this, US President Joe Biden called for Russia to be expelled from the Group of Twenty forum of the world’s largest economies. There isn't any major market-moving economic data due for release from the UK, leaving the pair at the mercy of the USD price dynamics. Meanwhile, the US economic docket features the release of revised Michigan Consumer Sentiment Index and Pending Home Sales data. The focus, however, will remain on geopolitical developments, which will influence the broader market risk sentiment. Apart from this, the US bond yields will drive demand for the USD and produce some meaningful trading opportunities around the pair on the last day of the week. Technical outlook From a technical perspective, the overnight slide stalled near support marked by the lower end of an ascending channel extending from the YTD low touched earlier this month. Given the recent sharp decline witnessed over the past one month or so, the said channel constitutes the formation of a bearish flag pattern on short-term charts. Traders, however, are likely to wait for sustained breakthrough the channel support, currently around mid-1.3100s, before positioning for any further depreciating move. The pair would then turn vulnerable to accelerate the slide towards the 1.3100 round figure mark. Some follow-through selling will set the stage for the resumption of the prior well-established bearish trend and drag the pair back towards the key 1.3000 psychological mark. On the flip side, any subsequent move up is likely to confront stiff resistance near the 1.3255-1.3260 region. Sustained strength beyond could allow bulls to make a fresh attempt to conquer the 1.3300 round-figure mark and lift the pair further towards the next relevant hurdle near the 1.3320-1.3325 region.

Market Forecast
25/03/2022

The uncertainty will remain high, yet opportunities are there

Russia ranks 11th in the world in terms of GDP with $ 1.57 trillion, but this ranking does not reflect its enormous wealth of the country. If Russia stops supplying its raw materials and agriculture to the rest of the world, then is likely global economy will be heading for a recession as dozens of other products that are the cogs of a giant supply chain will be in short supply. In such a scenario, commodity prices will remain high with an upward trend thus central banks will be forced to flood the economy with liquidity. In fact, if citizens find it difficult to get fuel and food, a new round of printing will begin so that governments can support them. Money printing, however, cannot produce raw materials and agriculture so their prices will remain high. With commodity prices at high levels, a recession is very likely, and to deal with it will need to create even greater debts. Central banks will have to choose between recession or inflation. Although the appearance of one does not necessarily mean the elimination of the other. The US is likely to raise interest rates to curb inflation, but this will slow down GDP growth while creating tightening in weak sectors of the economy as well as the US-linked economies. Europe, although more inflationary due to higher energy costs than the US, will follow the rise in interest rates but not to the extent that the US will do, since countries such as France, Italy, and Spain cannot accept high-interest rates hikes given their high debt to GDP. In addition, the new situation created by the war on European soil will lead EU countries to increase their defence spending, which is likely to lead to the removal of the 3% government deficit threshold for the Eurozone Member States to finance their defence equipment. This in combination with the fact that military operations are taking place in Europe makes the euro weak against the dollar. In such an environment, investments in agricultural goods and raw materials seem attractive, however, the variability in the above will remain high for a very long time as it will be constantly affected by developments in the geopolitical situation. On the other hand, the sectors that become attractive but also relatively stable are those that concern the defence industry and high technology companies in the US and Europe. The defence industry because defence spending is becoming more urgent than ever. High technology, because geopolitical instability makes it imperative to develop hi-tech companies from digital transformation to robotics, no longer in Asia but mainly in Europe and America.

Market Forecast
24/03/2022

EUR/USD Analysis: Bulls side-lined amid Ukraine crisis; NATO summit, EU/US PMIs in focus

EUR/USD remains depressed near the weekly low amid the emergence of some USD buying. The Russia-Ukraine crisis, Fed’s hawkish outlook acted as a tailwind for the safe-haven USD. Investors eye Eurozone/US PMIs, EU leaders summit and NATO meeting for a fresh impetus. The EUR/USD pair struggled to capitalize on the previous day's modest bounce from the 1.0960 area and met with a fresh supply on Wednesday amid the emergence of some US dollar buying. Tensions in Ukraine, so far, have shown no signs of de-escalating. Apart from this, the lack of progress in the Russia-Ukraine peace negotiations kept investors' on the edge. The market sentiment was further weighed down by concerns about surging oil prices, which continues to put upward pressure on the already high inflation due to the supply-chain bottleneck. This, in turn, took its toll on the global risk sentiment and drove some haven flows towards the greenback. The buck was further underpinned by hawkish comments from influential FOMC officials, signaling that they are ready to take more aggressive action to combat stubbornly high inflation. In fact, Fed Chair Jerome Powell, along with San Francisco Fed President Mary Daly and Cleveland Fed President Loretta Mester, indicated a bigger hike was in the offing at the central bank's May meeting. The markets were quick to react and started pricing in the possibility of a 50 bps rate hike at both the May and June meetings, followed by a 25 bps hike at the remaining meetings of 2022. This was seen as another factor that continued lending support to the USD. The shared currency was further pressured by the disappointing release of the eurozone Consumer Confidence index. According to the flash estimate released by the European Commission, the gauge dropped to -18.7 in March from -8.8 in the previous month. That said, the global flight to safety led to a modest pullback in the US Treasury bond yields and held back the USD bulls from placing aggressive bets. This, in turn, helped limit further losses and assisted the pair to find some support in the vicinity of the weekly low. The attempted recovery move, recovery, however, lacked follow-through buying and was sold into during the Asian session on Thursday. The pair traded in the negative territory for the fourth day in the previous five as the focus remains on fresh developments surrounding the Russia-Ukraine saga. US President Joe Biden has arrived in Brussels for a series of meetings on the Ukraine War. Biden will meet NATO and European leaders are set to announce a package of sanctions targeting Russian politicians and oligarchs. The incoming geopolitical headlines would play a key role in influencing the broader market risk sentiment and the shared currency, which, in turn, should provide impetus to the major. Apart from this, traders will take cues from the flash version of the Eurozone PMI prints. The US economic docket features the release of Durable Gooders Orders and the usual Weekly Initial Jobless Claims data and flash PMIs later during the early North American session. This, along with the US bond yields, will drive the USD demand and produce some meaningful trading opportunities around the pair. Technical outlook From a technical perspective, the pair, so far, has managed to defend the 23.6% Fibonacci level of the recent slump from the vicinity of the 1.1500 mark. The said support, around the 1.0960 region, should act as a pivotal point, which if broken decisively should pave the way for additional losses. The pair might then turn vulnerable to accelerate the slide back towards the 1.0900 round figure. Some follow-through selling would expose the YTD low, around the 1.0800 mark, with some intermediate support near the 1.0860-1.0850 region. On the flip side, the 1.1045 area now seems to have emerged as immediate resistance and is closely followed by the 38.2% Fibo. level, around the 1.1070 zone. Sustained strength beyond could push spot prices back towards the 1.1100 mark en-route last week's swing high, around the 1.1135-1.1140 region. The latter nears the 50% Fibo. level, which if cleared decisively would be seen as a fresh trigger for bullish traders and set the stage for additional gains. The pair might then aim to surpass the 1.1200 mark and test the next relevant hurdle around the 1.1230 region, or the 61.8% Fibo. level.

Market Forecast
24/03/2022

Stocks slip as oil and gas surge

European stocks have posted losses of around 1% on Wednesday, paring some of the gains we've seen over the last couple of weeks. We've clearly seen an improvement in sentiment recently as investors have become encouraged by the negotiations between Ukraine and Russia and the impact that's had on global commodity prices. There remains enormous uncertainty though which may limit any upside we see going forward given the scale of the rebound we've seen. There doesn't appear to have been a major step forward in negotiations in recent days and the bulk of the hard-hitting sanctions were levied against Russia shortly after the invasion. While further measures have been announced since, it seems a lot of the disruption was priced in early. We are seeing oil and gas prices rallying today which may be contributing to the declines we're seeing in equity markets, given the additional pressures that will put on households and businesses should it be maintained. The decision by Vladimir Putin to insist on payments from hostile nations for Russian gas to be made in rubles has caused a stir today. European gas prices have spiked on the back of the announcement, given how big an importer the bloc is, while equity markets extended their losses in the aftermath. It's unclear what exactly this will mean for importers of Russian gas and whether it will be possible, let alone straightforward given the sanctions that have been imposed. Putin has given the central bank a week to work out the details, at which point we'll have a much better understanding, but until then it just adds to the uncertainty. UK inflation rises as Sunak announces measures to ease the burden UK inflation spiked again last month, hitting 6.2% up from 5.5% in January and it's expected to rise much further this year. As per the OBRs latest forecasts, inflation is expected to average 7.4% this year, peaking at 8.7%, which obviously vastly exceeds the central bank's target. That prompted the Chancellor to outline a variety of measures aimed at alleviating some of those pressures this year including a 5p fuel duty cut, an increase in the national insurance threshold, and a cut in the basic rate of income tax, although the latter won't come into force until 2024. While that may ease some pressure, households and businesses are going to experience significant cost increases this year from an array of sources. And they won't have any help from the Bank of England, with interest rates rising for a third consecutive meeting last week with more to come. They appeared to signal a slight softening of stance alongside the announcement but the data and forecasts today may force a rethink. Oil surges amid further supply issues Oil prices are more than 5% higher after Russia confirmed that oil exports via the Caspian Pipeline Consortium (CPC) will fall by around a million barrels a day for up to two months as a result of storm damage. This comes at a time of significant tightness in the market and could contribute to further increases in the price in the coming weeks. That is of course unless other producers step up and utilise the spare capacity in order to prevent oil prices from hitting recessionary levels. But that still seems a stretch despite the efforts of leaders from a variety of consuming countries unless Russia decides to support such a move. Gold remains in consolidation Gold prices are a little higher in risk-averse trade but broadly speaking remain in consolidation, just as they have for the last week. The yellow metal is very much struggling for direction faced with high inflation but much more aggressive tightening and substantial uncertainty but improved sentiment. It may remain well supported given the sheer level of uncertainty but upside may face more resistance than we saw last month for example unless we see a significant escalation in Ukraine.

Market Forecast
23/03/2022

Russia-Ukraine War: Five reasons a deal may be closer than it seems, what it means for the dollar

Calm in talks, lack of fresh pressure on China implies potential progress.  Ukraine's proposed referendum and Russia's struggles also provide hope.  The dollar would fall on any deal, but a comprehensive accord is needed for a lasting effect. It might be darkest before dawn – the Russia-Ukraine war seems stuck in the mud after a month of fighting, but this stalemate could be a prelude to a deal. 1) Quiet talks: there has been no news from the negotiating table for a few days. When diplomats talk to the press, it is usually a sign that there is no progress and that they are trying to accuse the other side of failing to compromise. The current calm is a source of optimism – no news is good news. 2) UA Referendum: Ukraine's President Volodymyr Zelenskyy said that any deal would require a referendum. He seems to be preparing the public for some compromise – perhaps not only on NATO membership but also other matters. If he concedes territory to Russia, public support is needed for him not to be seen as a traitor. Laying the groundwork for a deal implies one has a higher chance to occur. 3) RU stuck in the mud: Russia continues failing to make any progress on the battlefield. Ukraine's soldiers and civilian fighters refuse to surrender in Mariupol, a strategic city in the south, despite lacking sufficient water and food. Moscow seems to have thought that the fact that most citizens there speak Russian would help. Local motivation with Western arms is turning Mariupol into Stalingrad, while the battle for Kyiv is not getting any closer.  4) Is Russia thinking beyond the war? The use of a hypersonic missile – unnecessary against Ukrainian defenses – can also be seen as a sign that Russia wants to sell such weaponry to other countries. It seems to be thinking about the post-war deals rather than trying to achieve any military goal. In the meantime, oil, gas and bond payments continue flowing to the West, a sign Russia does not want further escalation.  5) Quiet on the Chinese front: international pressure is growing to stop the war. From the Pope to mediators such as Turkey and Israel, via European countries which are mulling moving sanctions to the next level – on energy. The strongest country that can impact the situation in China, the world's second-largest economy. Beijing is politically aligned with Moscow but economically tied to the West. The fact that the US has stopped criticizing China is another positive sign. Dollar implications In case a deal is struck, there is a stark difference between a ceasefire leading to a frozen conflict, and a comprehensive accord that would remove sanctions. In the former scenario, oil prices would remain elevated. The global economy would continue struggling in a transition period. The dollar would recover from an initial fall, benefiting from Fed hawkishness. In case of a full deal, the greenback would suffer from diminishing demand for safe-havens and would tumble instantly. Re-integrating Russia in the global economy is better for risk assets than having Putin rule over a "big North Korea" – a large economy isolated from the world. More: Russia-Ukraine: Five scenarios for the war and implications for stocks, the dollar, gold and oil

Market Forecast
23/03/2022

Powell lights up the dollar

Overview:  Hawkish comments by Fed Chair Powell stoked a jump in yields and lit the dollar.  News that Alibaba was boosting its share buyback program to $25 bln from $15 bln helped lift HK shares, while the weaker yen favored Japanese exporters.  Most equity markets in the region advanced.  European bourses are showing a modest upside bias with US futures and are little changed.  The US 10-year Treasury yield is pushing five basis points higher to 2.34%.  European yields are also 3-5 basis point higher.  The dollar is rising against most currencies today.  The Antipodean currencies are the most resilient, while the yen and Norwegian krone are taking it on the chin.  The dollar, which began last week near JPY117.30, is knocking on JPY121 today.  Emerging market currencies are also mostly softer, led by the central European complex.  Hungary is expected to hike its base rate 100 bp to 4.4% today, while the key rate (one-week deposit rate) is expected to be raised by 30 bp to 6.15% later this week.  Turning to the commodities, gold is consolidating inside yesterday’s range.  The higher yields appear to be sapping demand.  May WTI is reversing lower after completing a (61.8%) retracement near $113.35.  US natural gas prices are also pulling back from better levels earlier today. Europe's benchmark is firm.  Iron ore slipped by 2.5% after a 1.6% loss yesterday.  Copper is recouping most of yesterday's loss, the first decline in four sessions.  May wheat is up about 3%, adding to yesterday's 5.2% gain and soy has fully recouped last week's 1.4% decline.   Asia Pacific Japan has lifted some Covid restrictions in Tokyo and outlying areas.  This will help set the stage for a recovery in Q2.  The earthquake earlier this month and the Covid restrictions hobbled the world's third-largest economy.  As we have been tracking, Prime Minister Kishida is reportedly cobbling together a supplemental budget of around JPY10 trillion (~$83.5 bln).  Meanwhile, with inflation set to jump starting next month (cell phone charges fell sharply a year ago) and global yields tugging the JGBs, the Bank of Japan may be forced again to defend its Yield Curve Control cap of 0.25% on the 10-year bond.  The yield is pushing above 0.20%.  India, which is a member of the Quad (along with Japan, Australia, and the US) to ostensibly check China, has a more nuanced relationship with Russia.  It bought the same air defense system from Russia as Turkey did without the fanfare.  As we noted last week, India is exercising options to buy Russian oil at a discount.  Indian officials hinted that three-days of the country's oil needs are being secured.  That is about 15 mln barrels over the next 3-4 months.  Last year, India reportedly bought about 33 mln barrels from Russia.  The amount is not so much.  After all, consider that according to reports, about 9 mln barrels of Russian oil is headed to the US this month and another 1 mln at least next month.  Businesses were given a 45-day wind-down grace period.  Rather what is more interesting is the that some reports indicate that India could pay rupee for the oil, but the payment might be benchmarked to the US dollar. The dollar extended its recent gains against the yen and is testing the JPY120.50 area.  Such lofty levels have not been seen for 6-7 years.  The next important chart point is not seen until closer to JPY121.50, but a move toward JPY125 over the slightly longer-term cannot be ruled out.  The dollar's ascent pushed it through the upper Bollinger Band (two standard deviations above the 20-day moving average) repeatedly last week.  It comes in near JPY120.30 today.  As we noted, the exchange rate is more correlated to rising US yields than as a safe haven (when it is inversely correlated to equities). The JPY120 area, which was "resistance" may now offer support.   The Australian dollar is trading inside yesterday's range (~$0.7375-$0.7425).  The high from earlier this month was near $0.7440, and the upper Bollinger Band is found slightly above it.  A break of $0.7360 would weaken the technical tone. After a few larger than normal moves, the dollar-yuan was confined to a narrow range today (~CNY6.3590-CNY6.3660).  It has remained within yesterday's range, which was itself within the pre-weekend range.  Recall that in the first part of March, the dollar was in a CNY6.3070-CNY6.3270 range.  It jumped to a higher range, roughly CNY6.3400-CNY6.3670.  The PBOC set the dollar's reference rate at CNY6.3664 today compared with projections for CNY6.3660 (seen in the Bloomberg survey).  Note that the China's premium over the US of 10-year yields is about 50 bp, the least in three years.   Europe Russia's invasion of Ukraine is a watershed in a way that Moscow's 2008 invasion of Georgia or the war with...

Market Forecast
22/03/2022

Powell has laid out the map but will he follow it?

Traders have had a weekend to think about the chaos. Last week was a lot to handle in many regards. Perhaps the most reliable clue we were offered was the Federal Open Market Committee roadmap to interest rate hikes. Despite the effort that has been put into the dot plot, we cannot overlook the wording that came along with it. In essence, the plan to raise rates a quarter of a point at each of this year's meetings is simply a guideline. If inflation persists, they will do more but if inflation rolls over they will do less. Today, the Treasury market priced in a little more than the dot plot. But we can't help but feel like it is getting ahead of itself. To be fair, we thought that last week but yields have continued to melt higher. Nevertheless, peaks in inflation have been historically quick and volatile. In other words, things can turn on a dime and the year is young. It's only March! We could be nearing capitulation inflation... Treasury Futures Markets                                                            30-year Treasury Bond Futures Speculators are extremely short in 10-year note futures. According to the latest COT Report issued by the CFTC, large speculators are holding a net short position of about 370,000 contracts as of last Tuesday. Judging by the bloodbath that has taken place since the market is even shorter now. We haven't seen speculators this short since the middle of 2019. There was a similar net short position in early 2020 prior to the Covid crisis. In both scenarios, Treasuries moved substantially higher as the short position unwound itself. Eventually, we will likely see a similar rally. Another thing to keep in mind as we watch Treasuries fall into the abyss. Tomorrow is the last trading day for the March contract. When trends are entrenched, we often see large spikes in the direction of a trend as the front-month contract drops off the board followed by a reversal. Look for such a reversal in the coming days as the long squeeze turns into a short squeeze (hopefully). Treasury futures market consensus: Was today the capitulation? It is hard to believe there are many bulls left. We can't rule out a probe to 149'0 in the 30-year and 122'15 in the 10-year note, but the best trades are likely from the long side. Technical Support: ZB: 149'0 ZN: 123'02 and 122'15 Technical Resistance: ZB: 153'08, 156'01, 158'09, and 160'12 ZN: 125'15, 127'10 and 128;21.   Stock Index Futures The ES is attempting a breakout. A break above 4340 last week was a bullish sign of things to come. However, breakouts rarely move in the initial direction without shaking out traders. We suspect the ES will come back to touch the previous downtrend line which will now act as support (around 4350). If you are a bull, this might be a good place to consider dipping a toe in the water. If you are a bear, you will want to see prices melt through 4350 and fall back into the previous trading wedge. For now, I am leaning toward this being a bonafide breakout. The VIX term structure is bullish, the chart suggests a solid base is forming, and seasonals turn bullish next week. Stock index futures market consensus: We suspect a test of 4350 could be in the works, but as long as that level holds the bulls are in control. Technical Support: 4350, 4125 and 4000 Technical Resistance: 4490, 4590, 4650, 4750, 4808, 4875 and 4925   E-mini S&P Futures Day Trading Levels These are counter-trend entry ideas, the more distant the level the more reliable but the less likely to get filled ES Day Trade Sell Levels: 4490, 4575 and 4615 ES Day Trade Buy Levels: 4350, 4140 and 4000   In other commodity futures and options markets... October 20 - Buy December 2022 (not 21) $7.00 corn calls near 12 cents. December 9 - Bull call spread with naked legs in wheat (buy March 8 call, sell the 8.50 and sell a 7.30 put). January 7 - Aggressive call option spreads in gold. January 10 - Aggressive call option spreads in silver. January 11 - May coffee ladders (buy May 240 call, sell 260 call and sell the 280 call). January 13 - May Corn bull call spreads with a naked leg (buy the May 6.50 call, sell the 6.00 call and then sell the 5.50 put). January 19 - May crude oil ladders (buy the May 85.00 call, sell the May 92.00 call and sell the May 97.00 call) for about 70 cents ($700). January 20 - May silver call...