Another short-covering bounce?

We have seen similar moves fade in this bear trend…

Stocks (1)

There was a sense of calm in the markets, but again without any fundamental news to suggest this is perhaps the bottom. Global equity indices and US futures continued their recovery after the comeback on Wall Street the day before. But as we have seen time and time again, stocks have struggled to sustain any recovery attempts as traders have been quick to take profit on rebounds amid a bearish macro back drop – rising interest rates, low growth and high inflation. As I mentioned on Thursday, when the Nasdaq was some 30% off the record highs, there was good a chance for a bear market rebound, especially as yields have come down a tad in recent trade. This may be that bounce I was looking for. Whether this will turn out to be just a small bounce or a sizeable one remains to be seen. But remember that we are now in a bear market and rallies tend to get sold into more often than dips being bought.

Just take a look how much cryptos have suffered and there is no reason why equities cannot fall further. Stagflation concerns are mounting, and monetary conditions may have to tighten a lot further to bring price pressures lower. Though Powell has reiterated that 75-bps hikes are not a base case, the fact that both PPI and CPI eased less than expected suggests the Fed will not hit the pause button any time soon.

Consumer inflation expectations

The latest measure of US inflation – the University of Michigan’s 1-Year Inflation Expectations index – will be release later and it will be interesting to see if respondents report even higher price projections than they did last month, which was 5.4% - a 40-year high:

220513 UoM consumer inflation expections

Expectations of future inflation can manifest into real inflation, as workers will push for higher wages when they believe prices will rise. So, until we see the trend turn downwards for consumer inflation expectations, it is likely risk appetite will remain low.

Looking ahead to next week

In the week ahead, we will have Chinese retail sales and industrial production on Monday, US retail sales on Tuesday and UK CPI on Wednesday, among the week’s macro highlights. The recent lockdowns in China means economic activity has slowed down sharply and we will find out the extent of it with these macro pointers. If we get weak numbers, then expect renewed weakness in risk assets as investor worries about a Chinese slowdown is revived. Globally, consumers are feeling the pinch with surging inflation. We will get a picture of how bad things really are at the world’s biggest economies. In the UK, meanwhile, inflation has climbed to a whopping 7.0% year-over-year in March, but there is hope that price pressures will come back down as the economy slows and due to base effects. Still, concerns over stagflation are likely to keep the pound and UK stocks under pressure for a while longer.

S&P bounces but faces key resistance

220513 spx

The S&P 500 is testing the bottom end of key resistance range between 3975 to 4061, shaded in red, where it had previously found some mild support. Unless that area is now reclaimed, the risks remain skewed to the downside, towards the long-term 38.2% Fibonacci retracement level (derived from the entire upswing from March 2020 low)

How to trade with FOREX.com

Follow these easy steps to start trading with FOREX.com today:

  1. Open a Forex.com account, or log-in if you’re already a customer.
  2. Search for the pair you want to trade in our award-winning platform.
  3. Choose your position and size, and your stop and limit levels.
  4. Place the trade.

Disclaimer: The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to Forex.com or GAIN Capital refer to GAIN Capital Holdings Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.

Open an Account