Good Friday has come just in time as markets have scooped too many toxic drivers. Once again, inflation has risen to a new record, the European Central Bank (ECB) has an apathetic attitude as it seems to be following the Bank of Japan’s monetary path, while the U.S. banking sector failed to inspire investors with strong Q1 2022 earnings reports. In China’s city of Shanghai military vehicles were spotted carrying out COVID-19 tests, according to officials.
The U.S. stock market is seemingly not at the edge as the S&P 500 broad market index closed Wednesday above 4390 points, but pressure on the major Wall Street benchmark may continue. Although, it is unlikely the index would drop by the end of next week, despite the very unfavorable technical picture as futures prices are very close to the 200-days moving average. Crossing it to the downside would signal a reversal of the upside trend in stocks.
Inflation in the United States and Germany is at 8.5% and 7.3% respectively, these are the highest levels since the 1980s. Monetary authorities in the U.S. promise to act, while the ECB is responding in a loose manner. With this reaction in mind, investors are preparing for a stagflation impact or for a shock and swift tightening of monetary policy.
The meeting of the ECB on Thursday went mostly as expected. The ECB noted high inflation risks, a threat of slowing down economic growth while leaving the quantitative easing program running. This may point to the fact that the ECB seems to have accepted high inflation as being persistent before a possible recession. This mean that the Eurozone could face the upcoming recession at the end of 2022 or at the beginning of 2023 with negative interest rates. What the ECB will offer help to tackle the recession is well known – lower negative interest rates, more quantitative easing directly from the market as the Bank of Japan does. This seems to be a grim picture. The Japanese economy, which was once an engine for global economic growth, has been stagnating for almost three decades. But monetary authorities seem to be following more political reasons rather than economic incentives. This policy started in 2020 when massive liquidity injections unwound the inflation spiral. This is likely to continue in 2022 as supply chains are disrupted due to political reasons.
Such conditions curb any economic growth but create fertile soil for stagnation. It could start any moment amid a possible geopolitical crisis over Taiwan or political turbulence in the United States. However, it is better to wait for a few months to see how the situation will evolve.
Corporate earnings reports for the Q1 2022, which were delivered by the U.S. banks this week, provide a little help to the stock market while some banks may indeed outperform the market. Although these reports were quite strong for the current market situation, they are not enough to boost the market up.
The technical picture for the S&P 500 index is unfavorable as the index is moving along a downside pattern with a target at 4100-4200 points before the beginning of May. It is not an aggressive downside so we may consider a 4390 level as a strong support by the end of next week. To open short positions we should have a rebound to 4480-4530 points first. However, other factors should also be taken into account.
Brent crude prices jumped off the support at $95-105 per barrel and is heading towards $112-115 per barrel. This is a key level for an upside scenario to $160-180 per barrel. However, a rapid breakthrough of the current resistance level seems to be unlikely now. May and June look more appropriate in terms of timing, considering technical factors and a possible Russian oil ban from the European Union. Moreover, International Energy Agency member states are planning to release 240 million barrels of oil in the market starting in May through to October. In this regard, May seems to be the perfect timing for such an upside move.
Gold prices rose to $1975 per troy ounce despite unfavorable conditions. Such an upside could be attributed to the flaring up conflict in Ukraine or geopolitical escalation over Taiwan. Nonetheless, strengthening of the U.S. Dollar and rising yields of 10-year U.S. Treasuries above 2.8% may signal a possible decline in gold prices by the end of April. Thus, short position opened from $1950-1960 per ounce with a target at $1840 are intact.
The Greenback is set for a final strike as the EURUSD fell to the 1.07000-1.08000 zone with an aggressive downside pattern. Short positions opened at 1.10450 could be closed. Although we may have a further downside to 1.07000 and below, it is better to have clear technical signs in order to take action.
GBPUSD remain in the downside pattern with a target at 1.28000-1.28500 by the end of April. However, the Cable failed to dive below a strong support at 1.30300-1.30400 trying to reverse to the upside, but failed too. With the rising uncertainty in EURUSD it is better to close short positions that were opened at 1.31200-1.31800.