The defense of the S&P broad market index at the 4390 points support level managed to remain intact. This could mean we are going to see a moderate decline of the index towards 4280-4300 points next week. This scenario was mostly clear at the beginning of April, but what is important is that the commodity market is now signaling the plunge of the U.S. stock market over the coming two to three months.
This plunge may be of 20% or 50%, with one single drop or two with a pause of a few months amid those two drops. There are many variations, but if we consider the coming drop as cyclical and similar to the 2008 pattern, a likely scenario could see a soft decline in spring and a hard landing in autumn.
Corporate earnings reports, macroeconomic data, statements of the Federal Reserve (Fed) and the European Central bank (ECB) are of minor importance to prevent this plunge. The Fed itself is flagging it as its Chairman Jerome Powell confirmed that interest rates in May and more further down the road would rise by 50 basic points. San Francisco Fed President Mary Daly said that a mild recession in the U.S. is possible after a near-certain series of interest rate hikes by the monetary policymaker. U.S. Treasury secretary Janet Yellen calls for EU caution on the Russian energy ban as it could harm the global economy.
But it seems to be late for any moves to prevent the upcoming recession. The Fed could have sharply hike interest rates a year ago to ensure a soft landing of the economy after control over inflation was restored. Economic growth could have been restored within a few months. But now the Fed is late with such actions which could have been put in motion before the likelihood of a market collapse and the start of a recession.. Any new massive monetary injections would amplify inflation and capital flight from the U.S. The Fed is racing towards a liquidity trap with no way out. That may mean that the Fed may have no choice but to carry out a loose monetary policy over the coming 10 to20 years. With this scenario developing, markets would be much more attractive for investors.
The only option that could save us from this scenario is a shocking interest rate hike to 5-6%. This may bring inflation under control but would put the U.S. economy in stand-still for five more years, keeping a strong Dollar in a dominant position and capital flowing into the U.S. Is the Fed ready for this? It could tolerate such a scenario if Brent crude prices surge to $160-180 per barrel. However, it might not be enough for the Fed to raise interest rates sky-high in 2022.
The S&P 500 index is alongside a downside pattern with a target at 4100-4200 points by the beginning of May. Short positions opened at 4480-4530 are intact as the index is likely to decline further to 4280-4300 next week. Moreover, these short positions could be mid-term if the stock market signals further down.
Brent crude prices rebounded from the first resistance level at $112-115 per barrel. A breakthrough of this level is key for the $160-180 per barrel scenario. However, it is likely to be activated in May as EU nations may declare a partial ban on Russian oil.
Gold prices rolled back fast. They reached $1940 per troy ounce but the drop is unlikely to continue through May. Thus, short positions on gold opened at $1950-1960 are likely to be closed by the end of next week. A new decline of gold prices may commence at the end of May or throughout June.
The currency market may expect to experience elevated volatility as the U.S. stock market starts to drop. EURUSD is very close to changing its downside pattern to the upside. However, upside efforts have failed to succeed this far.
GBPUSD has almost reached the target at 1.28000-1.28500. Considering a possible upcoming elevated volatility, it is better to seek buy opportunities after the pattern changes to the upside. This could be a perspective for next week.