Market Review 05/2022

In May, the S&P 500 was busy keeping investors worried, but it could not decide on its next steps. However, the fall from December highs proved to be deeper than we expected, and we cannot be sure that it is over. The S&P 3650-3750 range looks tempting enough for the market to try to revisit it sooner rather than later. In the meantime, it is best to give the market some room to decide on how better to start the summer.

Yes, we remain optimistic

As shocking to many as it might sound, we hasten to point out that, albeit being cautious, by no means we are changing our medium-term view: what we are seeing is not the beginning of the bear market, though “it feels” we are already in one. The more the S&P 500 readings approach 4000, the more we will hear analysts targeting 3800, 3600 and even 3000 levels. Remember, the more market falls, the more pessimistic players become.

European and US equity markets

Dollar, gold and oil prices

Last month we were looking at the 1.0450-1.0500 support area to produce a larger EUR/USD bounce off those lows. Market actually did drop slightly below that support zone triggering some stop-loss selling, but then we saw a fast turn-around and now might assume that the pair is heading to the 1.1000 area we kept mentioning. We still believe Mr. Market will try to attack the 1.03-1.0400 lows again, so we will be looking to sell euro near the 1.1000-1.1100 resistance area. Reasons are mainly the same – war is too close to Eurozone, resources are much more expensive in Europe and interest rates are more attractive in the United States.

Gold puzzle is yet to be solved. We considered XAU/USD 1820-30 area as a very important support and market did test it. Market context suggests that gold prices cannot stay at current levels forever and must eventually decide to either move up above XAU/USD 2000 or down to revisit 1670 level, which is key support on long-term charts.

Goldprice, USD/oz

Last month we mentioned a potential breakout in oil, while “hoping” for lower prices. Recent price action tells us that our target of USD 140 per barrel is now on the radar. There are many political aspects affecting the price (EU embargo in the first place), but, as always, it is very difficult to say how exactly market will react to the news and speculations. One thing is clear though, now prices are heading higher and all the upside targets should be taken seriously.

High Yield bond Indexes

China eases restrictions, Eurozone’s inflation hits a new record

Due to China easing its Covid-19 restrictions, its factory activity improved though still indicating contraction. Official PMI according to National Bureau of Statistics increased to 49.6 points in May from a reading of 47.4 in April. A slowdown in China is having a negative impact on production lines in other major Asian economies with both Japan and South Korea reporting sharp decrease in output. In May, Japan’s manufacturing activity grew at the weakest pace in three months, while South Korea’s April factory output contracted by the most in nearly two years. China’s official non-manufacturing PMI also showed a recovery in May but still remained soft, increasing to 47.8 from 41.9 points in April.

Contrary to China, the US manufacturing activity in May picked up the pace with the Institute for Supply Management index of national factory activity increasing to 56.1 point. Activity was supported by strong demand for goods, but manufacturers were struggling to find new workers as indicated by the survey measuring factory employment, which decreased to 49.6 in May, the first decline below 50 points since August 2021.

Manufacturing activity in the Eurozone slowed in May. The slowdown was impacted by supply shortages, high input prices and decreasing demand, which led to the lowest reading since the end of 2020. As expected, Eurozone’s inflation continued to increase and reached a record 8.1% mark in May, as reported by Eurostat. Despite an increase in inflation, Eurozone’s consumer confidence showed a slight improvement.

Benchmark 10-year bond yields

P.S.

Many experts and analysts have already rushed to claim the start of the bear market, although at least for now, there is still not enough evidence for such claims, but we are indeed closer to the “bad times” and recession / stagflation than we were 2 or 5 years ago. Of course, investing during such times is not an easy task, which is why we always emphasize the importance of serious diversification in portfolios (stocks and bonds alone are unlikely to be enough), especially when preparing for a great storm.