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  • Weekly Summary: S&P 500 is above 4100 amid “Schrödinger recession”

Weekly Summary: S&P 500 is above 4100 amid “Schrödinger recession”

The S&P 500 broad market index added almost 4% to 4100 points this week. Meanwhile, GDP in the United States demonstrated another negative quarter with a 0.9% contraction in April-June 2022 following -1.6% for the first quarter of 2022. Technically the second quarterly contraction of the economy means the economy is in a recession, but U.S. Administration downgraded it to rather a technical one, and Treasury Secretary Janet Yellen denied that the economy is in a recession.

On the other hand, Wall Street suggests that the U.S. economy has entered a recession, as well as famous Nouriel Roubini, a New York University professor, who warned that disaster is just around the corner. “I think there are many reasons why we are going to have a severe recession and a severe debt and financial crisis,” Roubini said. Mrs. Yellen and Federal Reserve (Fed) chief Jerome Powell responded by saying that there is no recession right now. However, Powell is more cautious with his words about economic recession, while Yellen insists that a recession is not imminent. Moreover, she said characterised the two last quarters of economic contraction in the U.S. as not signalling a recession, but as pointing to the economy as being in a transition period of recovery. We’ve entered a new phase in our recovery focused on achieving steady, stable growth without sacrificing the gains of the last 18 months,” she said.

To recognise a recession, it seems the U.S. Administration needs to see a much broader contraction that more severely impacts consumption, employment, and household earnings. “When you look at the economy, job creation is continuing, household finances remain strong, consumers are spending and businesses are growing,” Yellen said. The recession, according to the Treasury Secretary is a “broad-based weakening of our economy” that includes substantial layoffs, business closures, strains on household finances, and a slowdown in private sector activity. “That is not what we are seeing right now,” she said. This could mean that American citizens should lose about $2 trillion that was granted by the U.S. government during the last two years of the pandemic. This would also mean that the U.S. economy has to drop by 4-5%, more than during the 2008 Global Financial Crisis, when the U.S. banking system was on the verge of collapse.

The alternative is both the U.S. Administration and the Fed admit the recession is already here meaning no further tightening action by the Fed to contain inflation could be delivered. This would mean not only the recognition of the recession, but the inability of the monetary authorities to control surging inflation. The first scenario suggests that the U.S. would gear global recession, eventually bringing inflation under control and securing financial dominance globally. The second scenario would be far more damaging as it would mean the exit of investors from the U.S. Dollar and other U.S.-related assets as the Fed would lose control over the economic and financial situation, therefore devaluing the Greenback significantly.

Thus, the Fed is likely to continue rising interest rates even by a shocking 100 basis points in September if needed. If the Fed and the Treasury fail to get prices down before a broader economic contraction is indisputably in place, or before this October, the second scenario may come into force. In both scenarios, a large weakening of the U.S. Dollar may be the case.

The S&P 500 index continues to move inside an aggressive upside formation with a target at 4150-4250 points. It is likely the index may move further up as no severe impact on the market this autumn will be seen. So, it is better to wait for the index to climb further until clear signs of a possible meltdown emerge.

Brent crude prices are struggling to break through the $107-108 per barrel resistance level. However, it could happen at any moment as gas prices are reaching sky-high levels in July. Once this resistance is passed the upside scenario with a primary target at $135-145 per barrel and extreme secondary targets at $160-170 will become a reality.

Gold is enjoying a recovery as the Fed’s recent actions and the recession in the U.S. support prices of the yellow metal. Gold prices went above $1760 per troy ounce and may continue to climb towards the $1800-1820 resistance level. However, long positions are seen too risky to be opened now as gold prices are also expected to plummet to $1350-1450 by November. It would be better to wait for the prices to reach $1800 per ounce to consider opening short positions.

EURUSD has remained within the aggressive upside formation with targets at 1.03500-1.04500. The pair needs to close this week above 1.01900 to keep up with an aggressive stance. There are no good entry points so far.

GBPUSD has met its aggressive upside formation targets at 1.21500-1.22500. Traders should wait for the pair to close this week to consider further actions.