The world’s central banks started acting against inflation, and the stock market is moving on that.
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Central Banks Around the World Keep Increasing Interest Rates to Fight the Inflation Surge
Overheated prices are putting pressure on global economic growth, weakened by supply chain issues and the Eastern European crisis.
In the US, the closely watched consumer price index shows that inflation stays high. Pressure on household budgets was felt in the UK and France. The global economy is expected to stay flat this year as Europe falls into recession, China slows sharply, and US financial conditions tighten.
In Australia, the published April unemployment rate was 3.9% against the forecast of 4.0%. This was Australia's lowest unemployment rate since the 1970s, and the AUD stayed steady upon the release. With inflation uncomfortably high, today's figures allow the RBA to continue raising interest rates and potentially speed up the lifting cycle and rein in the loose policy. However, domestic factors seem to be sidelined in the exchange rate for the time being.
The Canadian CPI confirmed that inflation would continue to pick up in Canada and force the Board of Commissioners to further raise interest rates as the market had expected. May 18’s figures will likely strengthen the Bank of Canada's intention to tighten policy as inflation remains well above the Board of Commissioners' 2% target. In the meantime, the central bank is expected to raise its benchmark interest rate by another 50 basis points on June 1.
Global economic slowdown concerns kept weighing on market sentiment as the continued downtrends in equity markets revealed. In turn, that prompted safe-haven inflows towards the Japanese yen. The greenback edged higher against its high-yielding rivals but declined against the safe-haven currencies reflecting the downbeat market mood.
Overall, while JPY has benefited from a month-long risk-off market mood and the AUD from a weaker USD this week, risk appetite appears to be returning to the market. Also, concerns over economic growth in the world's two largest economies, China and the US, have resurfaced following weak retail sales and factory production figures in China and disappointing US manufacturing data. These factors can help firm JPY as they are boosting its safe-haven properties.
The UK economy unexpectedly contracted in March as the increased living costs forced consumers to reduce spending. Also, it cast doubts on the Bank of England's ability to continue raising interest rates. In turn, that is putting pressure on Prime Minister Boris Johnson's government to respond. As the official data revealed on Wednesday, UK inflation jumped to a 40-year high of 9% in April as food and energy prices soared, escalating the country's cost of living crisis. The 9% rise in the consumer price index was the highest since records began in its current form in 1989, surpassing the 8.4% annual gain posted in March 1992 and well ahead of the 7% seen in March this year.
AUD/JPY Consolidated After the Australian Jobs Report for April was Released
The AUD and JPY currency pairs consolidated their biggest daily losses in a week following the Australian jobs report.
Australia's main Unemployment Rate rose to 3.9%, refreshing all-time lows. At the same time, the decline in the Employment Change to 4K versus the previous 30K and the market consensus of 17.9K seems to have held AUD/JPY buyers back. Earlier last week, weaker-than-expected Australian Wage Price Index data for Q1 of 2022 challenged the RBA hawks.
AUD/JPY consolidated its biggest daily loss in a week around 89.50 after a fuzzy signal from the Australian jobs report for April, released early Thursday. As the wider Japanese trade deficit helped hold JPY to catch the current bid, the price is now retracing within the previous day’s candle.
AUD/JPY's reversal from the confluence of the 21-SMA and 50-SMA around the level of 91.30, together with a steady RSI, will likely support the upbeat sentiment. If it drops below 87.70, the monthly low of 87.30 can act as a support level before directing the pair to the 61.8% Fibo near 86.25.
UK Inflation Rate Spike Puts Pressure on GBP/USD
GBP is pressured by the UK annual inflation report and recession risk concerns.
In the middle of the European trading session on Wednesday, May 18, GBP in the GBP/USD pair retreated closer to its daily support range. The main pressure factor was the UK's annual inflation rate report for April 2022.
Primarily, the market is concerned about the risk of stagflation or even recession. Such pessimism comes as the UK's inflation rate hit its highest level since 1982 while the economy had already contracted in March, and consumer purchasing power remained depressed.
Technically, GBP/USD has weakened and is now at 1.2400. It will likely slide lower to an important support range of 1.2366-1.2328. While the steep drop may go below 1.2300, we are not expecting it to threaten the next support at 1.2230.
Stocks Have Struggled to Come Out of a Slump Over the Last Six Weeks as Worries Pile Up
Together with weak reports from various sectors, rising inflation has been increasingly pressuring businesses and dampening profits.
With inflation soaring, the war in Ukraine roiling global markets, and the impact of the pandemic still clogging supply chains, markets are nervous. On Wednesday, the Dow Jones Industrial Average tumbled more than 1,100 points. The drop supported the rumors that a recession is coming.
After a weeks-long sell-off on Wall Street that has only deepened in previous trading sessions, US stock futures edged lower ahead of the overnight session on Wednesday, May 18. Disappointing retail earnings raised concerns about the inflation impact. A large sell-off erased solid gains of the previous day.
The loss followed weaker-than-expected quarterly results from US retail sales that made investors worry about possible inflationary pressures on corporate profits and consumer spending.
The S&P 500 slumped 4% in its steepest drop since June 2020. The benchmark index is now down more than 18% from a record high hit at the start of the year. Usually, a 20% drop is considered a clearly bearish market. The Dow was down 3.6%, and the Nasdaq was down 4.7%. All three indices will likely extend a series of losses.
Inflation is Catching up to America's Biggest Retailer
Walmart’s quarterly results have been squeezed by higher costs of everything.
Recently, profits of retailers such as Walmart have been notably hit as supply chain costs weighed on sales. Unwanted inventories, such as TVs or kitchen appliances, are piling up. Walmart's weak report firmed concerns that rising inflation is putting pressure on businesses and can cut deeper into their profits.
Tuesday became Walmart stock’s worst day since October 1987 as it dropped 11.4%. On Wednesday, it dropped another 7%.
In the next few days, Walmart shares will possibly go into a correction. 125.00 is the round number and the nearest psychological level that will likely be targeted. We expect the panicked retail investors to calm down soon. That’s why, as the employment outlook and balance sheet look healthy, we believe the public will liquidate their debt. That may help stabilize professional defensive positions and boost stocks in the next few days.
Volatility in Commodity Markets Caused Financial Strains
Bearish sentiment spreads in financial markets. As of now, the price of Brent crude has been staying high above 100.00 for more than two months. This caused high inflation in most countries, falling stock markets, and volatility of other commodity prices. The impact of commodities on the rest of the market is disproportionately high and will likely spread into other areas of the economy.
Major market players are leveraged and sometimes get margin calls because they concentrate their exposure too much. Last week, the London Metal Exchange, or LME, canceled almost $4 billion in trades after the price of nickel spiked, knocking traders that were long out of their positions. The exchange is still fighting with traders who lost an estimated $1.4 billion from long trades on the metal.
“We need to look at measures that would improve the transparency in these markets and would enable market participants and regulators to identify risks and maintain orderly markets,” said an LME official, Ross Norman.
Their plan is to revise reporting requirements and then implement a position reporting system similar to that of the Commitment of Traders report.
The crisis is experienced not only in the nickel market but in most metals. While Chinese companies are bearish on them, cheap unchecked Russian exports are pressuring the price of gold and silver. In addition, as the global market participants shift to risk-off mode, the stock prices are dropping worldwide. However, in the short term, the price of gold has shown signs of a recovery.
On the daily chart below, the gold price shows signs of reversal. First, on May 19, a massive bullish move took the price farther away from the support level of 1786.30. Next, the MACD and CCI oscillators pointed higher and are giving bullish buy signals. In addition, candlestick analysis indicated a bullish engulfing candle formed during last week’s trading. Therefore, we believe the gold price will rise in the short term. Historically, in times of war or economic uncertainty, both of which are troubling the global economy today, gold has been a safe haven asset.
We Do Not Believe the Price of Brent Crude Will Fall in the Short Term
Bullish sentiment stays in the energy sector. While the price of Brent crude remains above the level of 100.00, most countries will struggle to get energy carriers and may resort to cheaper alternatives, such as coal or a dirtier type of crude. At the moment, crude is enjoying high demand.
There are two popularly traded grades of oil, Brent crude and West Texas Intermediate (WTI). Their prices reflect global economic activity. As the demand for crude oil rises, so does the demand for other commodities and financing, which indicates economic growth. At the same time, when the demand for crude oil rises due to a shortage of supply, the opposite happens, economic contraction.
Brent crude has been trading above 100.00 since the start of the Russia-Ukraine crisis in March. Its counterpart, WTI, has been showing a greater bullish tilt and could signal where Brent is likely to be headed next. This could be due to the fact that US oil is being offered to Europe as an alternative to Russian oil.
On the Daily Brent chart, the price is trading within a coiling unilateral triangle.
In classic technical analysis, this figure will continue with the previous trend, which in the case of the current market is oriented Up. We have outlined the level of 114.06 as the next logical profit target. The CCI confirms this bias as the indicator has stayed above the zero level during the last correction. As price action breaks higher, it is likely to do a fake breakout to the top, then break down, and finally establish a new trend with higher highs and higher lows.
Concerns Over Hidden Leverage Plague the Crypto Asset Markets
UST dropped and stayed below 0.09$. Last week, the news that stablecoins were entering a state of chaos was out, and the crypto market started plunging. Nevertheless, major coins like Bitcoin, Ethereum, and Litecoin are relatively stable. Litecoin is even making bullish progress. At the same time, the crypto Fear & Greed Index is now in extreme fear, marking another week of historically fearful sentiment.
As Warren Buffet likes to say, “Be brave when others are fearful.”
We believe that this is the best route to take in the current market conditions as Bitcoin has a way of growing unexpectedly, even when the rest of the market falls.
While Fear Spreads in the Crypto Market, Bitcoin Stays Stable
Analysts voice concerns over the opacity of crypto markets and the need to strengthen the foundation of transparency. Crypto markets are increasingly focused on their connection and integration with the other sectors of the global financial system. It keeps reeling after the collapse of a single stablecoin that made shockwaves spread across the entire asset class.
Although a drop was expected in the crypto market, Bitcoin stayed firm and did not even break through the local support level. This indicates the strength of this asset and shows investors’ interest. While the UST stablecoin has depreciated to $0.09 from $0.99, the price of Bitcoin remained above 29,600 and is currently above 30,000. The oscillators on the daily chart are showing strength. Therefore, buying Bitcoin now may bring profit by the end of next week.
Bitcoin is a risk-leaning asset, so the current risk-off situation in the stock market is a detriment to future pricing. Also, the major trend is still bearish, and new highs have not been made. In the meantime, in the previous financial crises, fiat currency was abandoned in favor of a new and untested Bitcoin in 2013. A similar scenario is possible today.
The rise of the US dollar is a major factor in the depreciation of Bitcoin. Under current market conditions, as the expected interest rate hike is being priced in, USD has risen significantly and started to play the role of a safe-haven currency.
Looking at the technical picture on the daily chart below, Bitcoin grew past the psychological level of 30,000. This is good news and will take one negative factor off the board. The second layer of confirmation for a buy is the MACD indicator lines crossing each other bottom-up. We also have the likes of the CCI indicator slowly creeping closer to the all-important zero level. Once the indicator line breaks above it, we believe a buy trade will bring profit intraday.
Risk warning: The content of the article does not constitute investment advice and you are solely responsible for your trading activity and/or trading results.
The Consumer Price Index (CPI) released by Statistics Canada is a measure of price movement produced by comparing the retail prices of a representative shopping basket of goods and services.
The US dollar bills were nicknamed “greenbacks” because of their color in the mid-1800s.
A safe haven is a type of investment that is expected to retain or increase in value during times of market turbulence.
The unemployment rate is the proportion of the labor force that can be but currently is not employed.
Stagflation is when an economy is experiencing inflation and stagnation of economic output at the same time.
A recession is a significant multi-month decline in economic activity. Often, a negative GDP growth in two consecutive quarters is considered a recession. Normally, it is accompanied by weaker real GDP, income, and employment dynamics.
In finance, leverage is any technique involving borrowing funds to buy things in hopes that future profits will be many times more than the cost of borrowing.
A margin call usually indicates that one or more securities held in the margin account decreased in value. When it happens, investors have to either deposit additional funds or sell some of the assets held in their account.
Symmetrical triangles are considered continuation patterns for the markets that are largely aimless. The breakout happens with a big volume and generally occurs in the direction of the existing trend.