US Fed is the Main Catalyst in the Financial Markets, Further Tightening Ahead 08.04.2022

In 4 out of 5 business days last week, USD grew against other currencies. USD/JPY formed one of the strongest uptrends and confirmed it by breaking the correction candlestick pattern indicated on the below chart. After that, however, it lost upward momentum. If JPY doesn’t firm early this week, USD may keep rising.

While most other currencies were stable, the hawkish US Fed and mildly dovish ECB made the EUR drop against the USD. The interest rate is the Fed’s primary tool and, therefore, it’s impactful on the world economy. This week, the US Core CPI and PPI figures will be released to indicate the inflationary dynamics. If inflation keeps rising, that may push the Fed to keep using the rate to fight it.

While the USD firms on a high interest rate, the stock market will likely suffer from high costs of borrowing and currency exchange. In the meantime, if people reduce or stop spending, that will affect the overall retail sales, and the stock market will drop even more.

After several days of a downtrend, stocks are trying to pick up upward momentum.

The US stock market was going down most of last week. On Thursday, US indices reversed to growth in the last hour of the business day. In the meantime, the market is digesting the Federal Reserve's Meeting Minutes. The report indicated that policymakers were ready to hike rates at each meeting throughout the year. The main goal is to stop inflation which has already reached 7.9% in March. The massive stimulus used by Fed during the Coronavirus pandemic and the unexpected rise of oil prices due to the Russia-Ukraine crisis are the main inflation drivers.

In the meantime, the tech and healthcare sectors supported the market. Primary banks such as JP Morgan Chase, Goldman Sachs, and Morgan Stanley will release their earnings reports this week, opening the earnings season in the US. While the performance shared for the first quarter is usually the strongest against other quarters, weak reports might set the tone for the rest of the year.

Some tech stocks and consumer brands are doing exceptionally well. Walmart and Costco, the famous consumer staple stores, have both seen strong uptrends. Walmart seems particularly worth investing in. When a reversal occurs, we suggest you add it to your portfolio. Putting this stock on your watchlist will allow you to buy it when a correction comes. The next earnings date is May 17, and technical analysis will likely be particularly useful in the month ahead.

We believe a good moment to open a position with the Walmart stock will come when the price drops down to the 20-period Simple Moving Average. The latter is also the centerline of the Bollinger Bands indicator. The CCI is above the level of 100. That means the path of least resistance for the stock price in the short term is down. That may be an opportunity to buy this stock at a discount.

Bristol Myers Squibb is showing superior performance in all aspects. This is a health tech company that manufactures and globally markets biopharmaceutical production. On Thursday last week, its stock price made a new record high. Moreover, while the rest of the market was experiencing a selloff, this stock kept growing. Several new drugs of Bristol Myers Squibb are at the testing and approval stage. We believe this company’s financial stability corresponds to its stock’s strong performance.

The next earnings report date is April 29. The current consensus estimate is $11.33bln. That is 2.28% higher than the figure for last year's first quarter. Generally, we expect the company to keep growing and suggest traders add this stock when it temporarily declines. Price dropping down to the 20-period or 100-period SMA has historically been a good moment to enter the market. The lower the trendline to which the price drops, the better the entry point.

Tensions caused by geopolitical uncertainty and the US Fed’s hawkish policy are currently the primary market drivers. While the state of the Russia-Ukraine conflict remains unchanged, sanctions against Russia are piling up, and more are expected.

On April 6, the FOMC released the March Meeting Minutes. It indicated a rate hike of approximately 170 basis points before the year’s end. That is nearly 70 basis points higher than the expectation formed after the January meeting.

The country’s inflation is the highest in four decades, and that makes many support the hawkish line. The Meeting Minutes boosted the US Dollar and the demand for safe-haven gold. The latter has been trading flat at $1,930 and near the 50% Fibonacci retracement level since January 2022.

The price of Brent oil went down after the IEA’s announcement of an additional 60 million barrels of oil to be released from reserves. That comes on top of the 180 million barrels to be released by the US as announced last week. Brent dropped to nearly $100 per barrel and may stay at this level due to uncertainties in the future supply and demand.

One of the reasons for such uncertainties is the stalled negotiations between Iran and the US on Tehran's nuclear program. That is a potential problem for lifting sanctions on Iran and additional oil production in it. In China, the three-year-long pandemic that has recently led to additional lockdowns and social restrictions also clouds the oil demand prospects. In the near term, additional steps to release oil reserves may help stabilize the oil price. In the mid to long-term, replacing these reserves will keep prices elevated.

The price of Natural Gas keeps rising due to supply worries and cold weather. While the market is waiting to see if the Russian Gas supplies halt due to payments in Russian rubles, storage supplies are driving the price higher. The Natural Gas price broke through both resistance levels we mentioned last week but failed to secure above 6.2920. After this level, the next resistance level will be at 6.5257 set by the price in October 2021.

 

Broken level of resistance

 

R1 (1st resistance level)

 

R2 (2nd resistance level)