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.