Weekly Summary: Yields’ Inversion and Non-Farm Payrolls

This difficult week ends with a sophisticated twist in financial markets. The American stock market lost all the gains it had made earlier this week. The S&P 500 broad market index futures rolled back to 4550 points. Brent crude prices are close to the important support level at $100 per barrel, while the U.S. Dollar is experiencing great volatility.

Investors’ hopes for further geopolitical negotiations that could push U.S. stock indexes to new highs have faded. Military actions in Ukraine continue. Moreover, fears over a possible recession in the United Stated have elevated as U.S. Treasury yields have reversed this week as 2-year Treasuries yields rose above the 10-year benchmark. Every time inversion occurs markets express panic in the short term, but quickly forget about this signal amid lullabies sung by some analysts that lull markets into thinking it is not relevant. Then the “Black Swan” suddenly appears in the form of the dotcom crisis, the Great financial crisis, COVID-19, military actions in Taiwan, the violation of presidential cycle in the United States, or an economic recession that hits the market.

Whatever the case, every investor should be ready for a classical cyclical decline that would last not only for  3-6 months as it was in 2020, but for a minimum of 12-18 months with a bearish trend in financial markets. However, the reaction of the U.S. Dollar could not be classic as usual, as the Greenback may become a weak spot of the global financial system.

The exact timing of a possible recession is hard to pinpoint. Most commonly, the recession starts within 12-24 months after Treasuries yields’ inversion. We should remember that financial markets are mostly ahead of the evolving situation, so we may expect the recession to start earlier within the next 6-18 months. This timeframe is rather wide, but it would be unwise to narrow it without clear technical signals. Even when these signals emerge, it could be several months before the recession actually starts. So, we have to wait for these signals first, and identify possible sell opportunities afterwards. 

This all would hardly be needed by the middle of next week, so stock traders may have a break, or switch to commodities or currencies while March Non-Farm Payrolls data on Friday would certainly affect them.

Our statistical modeling suggests a moderate optimistic report with  490,000 new jobs created in March, close to the consensus forecast. As for the unemployment level, it may be above the expected 3.7% considering initial jobless claims contraction by 31,000 in March. We expect unemployment to remain at 3.8%.

Nevertheless, the March labor market report could be considered to be strong, so the S&P 500 index that reached targets at 4600-4650 points may tumble amid fears of further tightening by the Federal Reserve (Fed) or may climb further on positive labor market data and fading fears of the recession. So, it is better to wait for better options to open trades.

Brent crude has one week left to implement the $160-180 per barrel scenario without any stopover by the second half of May. Brent crude prices went far below the important resistance at $120 per barrel confirming weakness of the market after promising negotiations between Russia and Ukraine, and an unprecedented order by the U.S. President Joe Biden to release 180 million barrels of crude reserves within the next six months.

The OPEC+ meeting was held without any surprises. The cartel and its allies continue to increase production by 400,000 barrels per day as agreed last year. Far more interesting is the attempt of Russia to receive payments for gas contracts with Europe in rubles. European countries refuse to follow Russia’s President Vladimir Putin order to pay for the gas in rubles. This may cause an artificial deficit of gas in Europe at some point, and this could trigger Brent crude prices to jump to the $160-180 per barrel.

Gold prices are struggling to stabalise  at the current level. But market conditions seem to be unfavorable for the bullion over the next two weeks. U.S. Treasury yields are at record highs putting pressure on gold prices. As trades opened at $1950-1960 per troy ounce with the target at $1840, trades could be put on hold.

EURUSD is within the upside pattern with the target at $1.13000-1.14000. The pair almost reached 1.12000, but quickly returned to 1.10500. Even more technical signals indicate a possible downside to 1.08000. High-risk sell positons that were opened at 1.10450 that survived recent high volatility could be kept.

GBPUSD is within the aggressive downside pattern with the target at 1.28000-1.28500. The pair has made several upsides to the sell zone at 1.31200-1.31400. We could hope the Non Farm payroll would present strong data to urge the Cable further down.