Weekly Summary: Big Tech Saves S&P 500 from Stagflation

It could be worse. This could be the highlight of the week as the S&P 500 index fell slightly by 0.2% to 4118 points, while it was 2.0% down at 4053 points in the middle of the week. Commodities were also down with Brent crude prices losing 4.5% to $78.60, and copper prices sliding by 2.5% to $8530 per ton.

Recession fears have exacerbated this week as GDP in the United States slowed down to 1.1% in the Q1 2023 compared to 2.6% in the previous quarter. Inflation numbers went sky-high as Personal Consumer Expenditure (PCE) Prices went up by 4.2% in the Q1 2023, missing expectations by just a 0.5% increase. It was also higher than 3.7% in the previous quarter.

First Republic Bank (FRC) contributed to these fears as it reporter a deposits outflow of $70 billion during the last banking turmoil. That is too much even for a large American bank. The losses were even larger considering the $30 billion it received from other banks led by JPMorgan in a rescue plan aimed at ramping up confidence. There is no one left to support the bank except the U.S. Government, which is also struggling to increase the debt ceiling. U.S. officials are coordinating talks over a new FRC rescue plan with efforts from other U.S. private financial institutions, including JPMorgan. FRC had to replace cheap deposit funding with more expensive Federal Reserve (Fed) provisions. Nonetheless, FRC troubles are unlikely to lead to a panic as both the Fed and the Ministry of Finance are deeply involved in mitigating the issue.

The help came from the Big Tech sector that delivered strong first quarter financials and literally saved the market from collapse.

But inflation spikes together with economic slowdown are clearly indicating a stagflation trend that is much more dangerous than the recession itself. This time the Fed is unlikely to achieve a soft landing for the American economy as this recession is seen to be much severe than a standard one. If the Fed acts flimsily the repercussions of this stagflation would be manifested throughout the entire economic cycle over the next 7-10 years. Thus, the Fed has to be extremely hawkish during its next monetary policy meeting next week, marking a clear path to bring down inflation without further supporting the American stock market. Otherwise, the U.S. and the global economy may be engulfed by a structural crisis.

Technically, the S&P 500 index has an upside formation with targets at 4500-4600 points. This scenario will become the primary one if the index moves above 4180-4200 points. However, fundamentally it is unlikely to happen.

The recession scenario chances are rising in the oil market as Brent crude prices continue to tumble below $80.70 per barrel. Recession targets for this scenario are at $40-60 per barrel of the Brent crude benchmark. Prices are testing the support at $77.00-79.00 per barrel. Once they break through, prices may accelerate towards $67.00-69.00 per barrel.

Gold prices are moving inside the mid-term upside formation with targets at $2000-2100 per troy ounce that have already been met. However, the tension is mounting as prices may continue to go down to $1900 per ounce if they pass the $1980 threshold. If the support survives, prices may lift to $2080-2100 per ounce. So, it is better to wait until the battle over $1980 ends and prices move above $2000 per ounce. The battle is still in process.

The U.S. Dollar is expected to be supported by the continuous upside signals. Short trades for EURUSD opened at 1.06700-1.07200 with a downside target at 5000 points below the opening level and the same 5000 points for a stop-loss order are intact. The decline of the EURUSD to 1.05000-1.05500 was used to close half of the trade. The other half should be continued until the targets of 1.03000-1.03500 are met.

Short positions for AUDUSD from 0.66900-0.67400 with the target of 3500 points and the same stop-loss order could be closed to balance loses originated from short positions for GBPUSD from 1.23300-1.23800 with a target of 5000 points and the same 5000 points for a stop-loss. The overall profit from these two trades should not be wasted.