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Last time we pointed out that though an ongoing consolidation / correction might bring yet another drop and lots of negativity and outcries, we did not expect equity markets to fall below the February / March lows. Well, market decided to prove us wrong, with S&P 500 almost reaching a 4050 mark, before a relief rally started after Jerome Powell stepped in to calm the market participants down.
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.
As expected, inflation in Eurozone increased to yet another record high of 7.5% in April. Energy costs were the largest contributor, but the rate of energy inflation actually declined compared to March, while price growth in food, services and non-energy industrial goods accelerated. We now see that inflation is becoming increasingly broad-based. Eurozone manufacturing output growth was slower in April mainly due to an increase in input costs. The Eurozone economy grew by 0.2% in the first three months of the year with a sharp weakening toward the end of the period due to war in Ukraine.
US factory activity grew at its slowest pace in more than one and a half years in April – the ISM index of national factory activity decreased by 1.7 points to a reading of 55.4, the lowest since a matching reading in September 2020. Services industry, which accounts for more than two-thirds of US economic activity, also slowed. The US economy unexpectedly contracted in the first quarter amid a surge in Covid-19 cases – gross domestic product decreased at an annualized rate of 1.4%.
Lockdowns across major Chinese cities contributed to the weak economic data. China’s factory activity contracted at a rapid pace in April – the official manufacturing PMI decreased to 47.4 in April compared to 49.5 in March, and that is a second straight month of contraction according to the National Bureau of Statistics. Activity in China’s services sector also shrank – the Caixin services PMI was 36.2 points in April (second lowest level since the survey began in 2005) compared to the reading of 42 in March.
Another month of war has passed and it seems that markets are getting used to these circumstances. We have mentioned EUR/USD 1.0600 support level quite a few times lately and it has finally surrendered. Market cleaned stop orders below 1.0600, but we did not see much of a follow-through so far. Long-term charts show a well-defined horizontal support for EUR/USD around 1.0450-1.0500 area, which has been rejected several times during the last 7-8 years. While in the nearest future market might be able to hold this support once again and bounce to the 1.1000-1.1100 level, there is now a serious threat that eventually 1.0450 mark will be broken, resulting in a major sell-off. 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.
After a very “emotional” March, oil has remained volatile, but the amplitude of the volatility declined. Such price action is usual for a consolidation phase, as oil is trying to gather steam for a re-test of previous highs at 140 dollars per barrel. Who knows, “the black gold” might even attempt to get closer to USD/bbl 180 levels. On the other hand, world “craves” for cheaper oil and there is always a risk that instead of prices going to the new highs, we might see a drop towards USD/bbl 80 levels, so we are watching price development very closely.
Bond markets keep pricing in more and more interest rate hikes, though chief bankers are trying to calm investors down. In their latest statement and interview, FOMC chose a more balanced tone than many expected, easing fears that bigger rate hikes would wreck the economy. Yes, the FOMC raised the federal funds rate by 50 basis points to a range of 0.75%-1%, its biggest hike in 22 years, but Jay Powell immediately let the markets know that while inflation was his central concern, the Fed, currently, “is not actively considering a 75-basis-point rate hike”. As Deutsche Bank’s Jim Reid put it, “The Fed intentionally or unintentionally decided that the market has had enough stress for now and clamped down on the more hawkish potential near-term paths for policy”. With this said, US rates now are almost perfectly flat across the whole yield curve.