Week Ahead: Hawkish “Fed speak” May Lift USD Index to Fresh Two-Year High

Economic Calendar for Next Week

Traders and investors worldwide will be closely monitoring the slew of speeches by officials out of the world’s most influential central bank, amid these other major economic data releases and events in the final days of Q3 2022:

Monday, September 26

  • EUR: Germany September IFO business climate and expectations
  • EUR: ECB President Christine Lagarde speech
  • USD: Speeches by Boston Fed President Susan Collins, Atlanta Fed President Raphael Bostic, and Cleveland Fed President Loretta Mester

Tuesday, September 27

  • CNH: China August industrial profits
  • USD: Speeches by Fed Chair Jerome Powell, Chicago Fed President Charles Evans, St. Louis Fed President James Bullard
  • Brent: OPEC to publish World Oil Outlook

Wednesday, September 28

  • AUD: Australia August retail sales
  • EUR: ECB President Christine Lagarde speech
  • US crude: EIA weekly oil inventory report
  • USD: Speeches by San Francisco Fed President Mary Daly, Atlanta Fed President Rafael Bostic, Chicago Fed President Charles Evans

Thursday, September 29

  • NZD: New Zealand September consumer confidence
  • AUD: Australia August job vacancies
  • EUR: Germany September CPI, Eurozone September economic confidence
  • USD: US weekly initial jobless claims, 2Q GDP (final)
  • USD: Speeches by Cleveland Fed President Loretta Mester and San Francisco Fed President Mary Daly
  • Nike quarterly earnings

Friday, September 30

  • NZD: New Zealand September consumer confidence
  • JPY: Japan August jobless rate, retail sales, industrial production
  • CNH: China September PMIs
  • EUR: Eurozone August unemployment rate, September inflation
  • GBP: UK 2Q GDP (final)
  • USD: Speeches by Fed Vice Chair Lael Brainard and New York Fed President John Williams
  • Tesla’s AI day

Earlier this week, the US Federal Reserve signalled its intent to send US interest rates even higher than expected.

Such policy signals then spurred the US dollar onto greater heights, while dragging many of its major peers to fresh lows, including:

  • EURUSD: trading below parity, lowest since 2002
  • GBPUSD: trading below 1.13, lowest since 1985
  • USDJPY: spiked briefly above 145, Yen’s weakest against US dollar since 1998 (before USDJPY eased back lower due to currency intervention by Japan’s Ministry of Finance).

READ MORE: Why FX markets react to central banks?

There’s Still Room for the Us Dollar to Climb Even Higher

This is because, somewhat oddly, markets have yet to fully price in another 75-basis point hike for the next FOMC meeting in early November. And that’s despite the hawkish signals out of the just-concluded FOMC meeting earlier this week.

The odds for a fourth consecutive 75bps hike (at November FOMC meeting) currently stand at 85.6% at the time of writing.

And if those odds are ramped up closer to 100%, encouraged by Fed officials who continue banging on the same hawkish drums in the coming week in drilling home the message that US interest rates will continue to push higher and stay elevated for longer in the central bank’s quest to quash stubbornly-high inflation, that may well push the equally-weighted USD index to the 1.25 mark, levels not seen since the onset of the global pandemic in 2020.

Furthermore, if there’s also a ramping up of geopolitical tensions in the days ahead, that should spur more demand for the greenback as a safe haven asset.

But first, we could see an immediate pullback for this USD index, seeing as its relative strength index is on the cusp of breaking into overbought territory.

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Natural Gas Price Drives Crude-SPY Trends When USD Is Appreciating

As most energy transactions are conducted in US Dollars, this makes sense. Yet, with the recent agreement signed by Russia & China to conduct future energy transactions in Rubles & Yuan, will it result in more muted price trends in the future?

Natural Gas Weekly chart

When the US Dollar rises, Natural Gas bullish price spikes seem to inflict greater disruption events in Crude Oil and the SPY. It appears that when Natural Gas spikes excessively, global nations are trapped in a US Dollar based economic crisis to supply electricity, heat, and other economic essentials to their communities.

US Dollar Strength May Disrupt Energy & Currency Valuations As Recession Looms

This disruption in economic stability translates into greater risks for consumers, manufacturers, governments, and others. The shock of rising Natural Gas prices while the US Dollar is strengthening presents a real problem for many foreign nations dependent on importing energy.

This is likely why the recent Natural Gas price spikes have helped drive the SPY lower over the past 6+ months. The concern that rising energy costs could work to break economic function in certain nations becomes very real when Natural Gas moves to $3.50. It becomes even more critical when Natural Gas rises above $6~7.

Natural Gas Weekly chart

My research suggests energy will continue to play a significant role in driving future trends in the global markets that conduct business transactions in various currency forms. It will simply push buyers & sellers to hedge foreign currency risks related to US Dollar strength or weakness. In short, the energy transactions will still be executed in a US Dollar base valuation – although they will be executed in foreign currency denominations.

Will Ruble & Yuan Strengthen After the Deal?

There is one aspect of the deal between Russia & China that we’ll have to watch over the next 10+ years. Will this deal strengthen the Ruble & Yuan, or will it isolate these currencies and work to peg the Ruble/Yuan toward similar valuation levels? In a way, this is a bold move by Russia & China attempting to move their currencies into position to battle the US Dollar. But at the same time, if it fails to support the Ruble & Yuan, then it may work to devalue them in tandem.

The currency alliance between Russia & China may act as an anchor between the two currencies where any future broad global trends may drive both the Ruble & Yuan in a similar direction. The result could be an Oil/Energy based Ruble/Yuan correlation to the US Dollar or British Pound.

Natural Gas Weekly chart

Long Term Forecast

If Natural Gas begins to slide downward over the next 6+ months and breaks below $5.50, then I believe we may see a resurgent upswing in US stocks and other assets. Until then, I think the continued economic and global energy crisis will hang over the US markets headed into Winter 2022.

There is a chance that US markets may start a Christmas Rally over the next 30+ days and attempt to move into some type of end-of-year rally phase. But the global risks related to energy prices, inflation, and the US Fed may continue to disrupt rally attempts closing out Q4:2022. In short, we may not see any real relief from energy/inflation pressures until Q1 or Q2 2023.

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Riding a Sea of Green, Oil in Focus +G7 Makes it Official on Gold, Forex Focus on Sintra

Indeed, it was an epic bear market bounce, especially as doom and gloom prophecies have recession storm clouds billowing vertically with the horizon.

We calculate the lack of selling was enough to explain some of the bounce as there was minimal buy flow from retail or otherwise bankrolling this rotation rally.

On bonds, we think the street will wait until we are closer to the next CPI release to re-enter shorts as seasonal factors support the duration rally, so there might be more breathing room for stocks amid this fragile détente.

University of Michigan’s final release revised the 5-10y inflation expectation to 3.1% from 3.3%. And the 1y inflation expectation was adjusted to 5.3% from 5.4%.

On the surface, it suggests it was unreasonable for the Fed to decide on monetary policy with a backward-looking approach. With 5y5y breaks still in check, many now think it was unnecessary to hike 75bp based on one data survey. So, the softer Fed Funds curve on Friday was due to the more faded inflation reprint.

I would ignore it for a straightforward reason. Higher oil prices are inflation enemy number one for the Fed. And lower gasoline prices are at the top of the Biden administration’s election plan ahead of the November midterms. With the Fed focusing on the headline over core, US monetary policy is increasingly captive to oil prices. That observation implies higher volatility around the Fed’s reaction function. Hence with oil and gasoline prices staying high, the Fed will keep the rate hike pedal to the metal.

In addition, any hot data prints will provide room for higher repricing in front meetings, especially with a narrow window for the FED to sprint to the finish line and hit the end-of-year terminal rates target. In that view, the risk-reward for further front-loading of hikes is attractive.

We think the next multiple legs lower in the S & P 500 will come from a de-rating in earnings. Last week I suggested there was no need to risk a career mistake selling blocks of SPX 3700 at +30 VIX. Indeed, institutional sellers will need a lot more confidence that the earnings deterioration is happening now and that the consumer has stopped spending. Both go hand in hand; declining consumer spending does represent the main threat to earnings for big-ticket items – especially in the case of a recession.

And, of course, with the most significant pension month-end and quarter-end rebalancing buy estimate since March 2020 laying in wait, folks are less inclined to step in front of a month-end bounce.

Energy equities were under enormous pressure until Friday’s reversal, consistent with the broad drawdown across the commodity complex driven by growing recession and demand concerns. And that should remain a pressure point.

Hence, I suspect commodity markets will remain in focus, particularly oil, given the extent to which energy inflation fears have driven risk this year.

Oil Prices

Price action will soon tell us if the latest dive was a function of demand destruction or crowded positioning? But one thing is sure: the oil complex is not nearly as impervious as many had thought.

After getting hammered most of last week due to recession and fuel demand destruction concerns, oil prices rallied into the weekend on the back of physical demand. Those global economic worries were seemingly offset by higher China demand for “real world barrels.”

Indeed, energy demand in Northern, Central and Northwestern China hit record levels as millions turned on the AC to escape the oppressive heatwave, which likely created the Domino effect. Record-high electricity impacts not only fuel-intensive industry production but also oil prices.

There could have been some element of the tail (time spreads) wagging the dog(spot), but the curve in heavy backwardation for a while, but when word starts spreading that China is a premium for prompt barrels, it’s more than enough to spook shorts.

Although oil is a spot asset usually driven by supply and demand fundamentals, it is not unusual for the complex to trade like an anticipatory asset (stocks and forex) driven by the broader economic growth rate of demand, which is slowing if the PMI data are dependable.

Our view has been unwavering; in the absence of fresh supply, it will be challenging to see Brent trading below 100 as Ukraine -Russia war escalation will continue to drive energy price fears.

On the other hand, it is a fallacy to think Brent Crude l could stay +$120 given the amount of central bank-induced slowdown likely to be seen later in the year. The Fed and other inflation-fighting central banks want lower commodities, which is what they are explicitly trying to engineer.


G-7 countries will make it official that they have stopped buying Russian Gold. Since Russian Bars have been considered politically tainted in the West following the country’s invasion of Ukraine, I doubt making it official will have much impact on the gold market as it was assumed that Russia would keep domestic production at home to soak up surplus USD and prevent excessive appreciation of the Ruble. But there could be some headline bounce at the open.



Last week’s Eurozone PMIs added to a laundry list of reasons to be suspicious about chasing the Euro higher. From the Ukraine War to China’s lockdowns, economic activity looks bleak. At the same time, this would typically be enough to send the EURUSD shuffling towards parity on the back of a hawkish Fed. However, the street is conflicted with the ECB on the brink of a momentous policy pivot while setting the springboard to exit negative rates.

I do not think the street wanted to be short Euro ahead of this week’s Sintra meeting that could cement expectations for an impending exit from negative rates and possibly rolling out a functional anti-fragmentation “backstop.”

On another counter-trend trade, we still think the Yen offers attractive skew due to rising US recession risks and the prospect of a change in monetary policy in Japan itself. And with intervention rhetoric picking up, Tokyo could be guarded about buying dollars up here.

Asia FX

As usual, the Ringgit continues to be driven by external factors while underperforming the terms of trade improvement due to its high beta to CNH weakness, outflows from domestic investors, and exporters unwilling to convert USD due to the hawkish Fed.

However, with global risk sentiment improving and the Yuan rallying, we could see follow-through below 4.40 early in the week if US yields continue to trade soft.

Circularity Stagflation Concerns, Euro Falls Like a Faulty Hot Air Balloon and Oil Wobbles

Global Macro and Stock Markets Analysis

Equities are selling off again with a lot of macro data points to digest ahead of CPI later today, including China’s Covid situation regressing and the hawkish pivot from several central banks this week triggering rates higher stock markets lower negative feedback loop. Not to mention the increasing number of corporate profit warnings, as inventories swell they tend not to age well.

With monetary policy feeding lower growth expectations, there is a degree of circularity stagflation concerns building as central banks continue surprising to the hawkish side with no end in sight until inflation moves more convincingly towards the target. Indeed, this week highlights a broader point about central banks’ implicit comfort in accepting lower asset prices.

But worryingly, the markets are now concerned US CPI did not peak in March, and indeed there may be even higher prints in the coming months. Continued strong inflation prints would put the FOMC under pressure to move faster on rate hikes which would provide massive soundboard for the hard landing crowd.

In any case, this stagflation narrative has begun to play out in broader macro, with curves flattening and commodities struggling to push on while the dollar remains bid. Therefore, it is unsurprising to see areas of the equity market sensitive to global growth get massively hit.

Oil Fundamental Analysis

After shaking off the China lockdown, for the most part, the oil complex has accepted China’s stop and start economics; crude oil is taking a bit of a hit due to the stronger US dollar as stagflation concerns knock down broader markets again.

And another stifling point for energy bulls is since the ongoing global release of strategic reserves and the recent increase in OPEC+ production quotas are doing little to cool oil prices, they think US policymakers could grow increasingly desperate ahead of the November elections and may even allow Venezuelan export to Europe, which could be a price capper.

But the clearest read-through for oil markets, regardless of what stock markets are doing, is as we head deeper into the US summer driving season, tight oil and product markets should still support oil.

Meanwhile, an explosion and fire at the Freeport LNG terminal support natural gas prices and provide a bullish knock-on effect across the energy spectrum. The US has been the biggest exporter of LNG this year and has played a significant role in alleviating some pressure on Europe as Russian gas exports have declined.

The Freeport outage will support prices in the near term and recovering Asian demand may mean fewer LNG cargoes for redirection to Europe ahead of the 2022/23 winter season. The gas storage situation in Europe is looking less dire than at the start of the year, but there are still considerable risks in the coming months which mean it may be too early to count on gas prices beginning to normalize.

Friday’s FOREX Follies


The Euro is falling like a faulty hot air balloon where the action speaks louder than words.

The ECB’s message was clear about leaving the door open for more extensive hikes due to wage growth concerns and admission of faulty forecasting. But crucially, the much-talked-about spread control tool was merely hot air. After all, any buying program would have been hard to justify in the context of exit from APP and negative rates and PEPP reinvestments just will not cut it.

Markets have priced out a 50 bp hike in July, while a 25 bp hike in July was already a foregone conclusion as far as the market was concerned. Now that the ECB has laid out its intentions regarding July being on the table, it is now a case of action speaks louder than words

Why the ECB talked themselves into a corner by more or less committing to 25bp is not clear, but if they see the market become concerned about peripheral spreads, it is unlikely they would go 50bp in July before they have worked that out through some spread control tool.


Time for the USDJPY catch-up trade?

One of the potential drivers of the USDCNH rally was CNHJPY hitting 20. With CNHJPY back up around 20 after the latest move in USDJPY, it is worth adding longs again, given the previous inclination for FX traders to play catch up with the USDJPY


IN an ominous signal, the loonie is lower despite a hawkish Tiff. And for us, that cut our FX chops trading CAD on Bay Street, and who refer to the loonie as the ” truth,” it is a gnarly sign for global growth.

Bank of Canada Governor Tiff Macklem sounded hawkish on the wires, saying chances of rates going above 3% have risen and more or more significant rate hikes could be on the cards, yet the Canadian dollar underperformed severely.

For the central bank fraternity intent on frontloading rates, as we turn to chapter two of the current playbook, it now reads that aggressive tightening risks a material decline in housing, consumer confidence, and consumption that will eventually drive their respective economies into recession and send stocks tumbling.


Even temporarily losing the China tailwind exposes the underbelly of the AUD, a housing bubble sitting atop an iron ore mine.

RBA will continue front loading rate hikes, focusing firmly on getting inflation under control. As fixing periods end, these hikes will hit like a Mike Tyson punch in the face to Australian homeowners, some of the highest leveraged property owners on the planet. Aggressive RBA tightening risks a more secular decline in housing and a hard landing for the economy.

Equities Start the Week Positively: a Return to Trend Growth, Not a Recession

Global Macro and Stock Markets Analysis

Equity futures start the week positively, with news of easing mobility restrictions across several districts in Beijing and Shanghai supporting risk sentiment, illustrated through strength in travel and luxury sectors.

Thoughts of a slower Fed rate hike glide path continue to send positive reverberations across global stock markets. And the resulting softer US dollar provides a tailwind for most commodity and other risk markets.

But the most significant readthrough during the past week is the markets are now pricing in return to trend growth, not a recession. While the market-implied growth rate is a long way below the pricing at this cycle’s peak in Q2 ’21, it is only a touch lower than what was being priced just before the Covid outbreak.

Today, China’s May manufacturing PMI will likely remain below the 50-mark, demarcating expansion, and contraction. However, such weakness should be shrugged off as economic recovery starts to be priced in.

Oil Fundamental Analysis

Brent breached $121/bbl overnight as Crude prices were supported by news that Covid cases are dropping in China and restrictions are being eased further. Hence the market is in the throws of pricing in some semblance of mobility normality in China’s largest cities.

Expectedly, the EU reportedly disagreed on the proposed embargo on Russian oil over the weekend, but discussions will continue today.

Oil traders view the EU agreement as a bit of red herring, given that individual member states and key corporate buyers in Europe are already phasing out purchases of Russian oil through self sanction. For instance, while Russia is still producing oil, a record amount of output from the Urals is now on the high seas looking for a home.

A unified EU deal may help the political optics. Still, significantly less Russian oil will flow to Europe over the remainder of this year, a comprehensive deal, or no deal.

FOREX Fundamental Analysis

Asia FX

A rally in US equities and waning China pessimism provided a platform for a rally in Asia FX, with the much-beleaguered ringgit trading below 4.37. However, for the USDMYR to challenge the low 4.30s and the rest of Asia FX, including the Yuan, to bounce significantly higher, there may need to be a more comprehensive China economic reopening which will unlock gushers of regional positivity


German inflation again surprised substantially to the upside at 8.7% year-on-year, on the back of higher Spanish CPI earlier Monday. And this drove the EURUSD slightly higher on the day. Indeed, this will put significant pressure on the ECB to consider a 50bp hike in July and remove negative rates in one go.

However, ECB Lane pushed back against 50bp hikes: removing stimulus “should be gradual”, quarter-percentage increases in July and September will be “benchmark pace.”

But this holiday-shortened economic calendar will be packed with important US data releases that will inform the Fed’s near-term growth and labour market outlook heading into the June 15 FOMC meeting. Hence, traders were reluctant to push the envelope above 1.08 just yet.

British Pound

GBP continues to polarise views across the investment community, with a general sense of bearishness seeming an ever-constant reality. BAML is the latest to warn of an “existential” GBP crisis and a perfect storm due to the current account deficit, EU/Northern Ireland, and questions over the BoE’s credibility. This toxic combination of factors could make it increasingly challenging to attract portfolio flows to finance the widening current account deficit. Keeping the GBP soft on the crosses and straight up against the US dollar if US economic data positively surprises this week

Negative Feedback Loop, Oil Off the Lows ,Gold Shines + Friday Forex Follies – G10 and Asia FX

Global Macro and Stock Markets Analysis

Broader indexes are off the lows, but conviction remains near zero. The rebound was primarily due to covering bids by crowded shorts and a slight bounce in higher beta Tech as bond yields fall.

Mounting global recession risk is top-of-mind for markets but as the procession to recession shortens, growth concerns are rising, leaving equities vulnerable to the negative feedback loop.

What would typically be met with a shoulder shrug, incrementally weaker data can now amplify downside move. And with few positive developments of late, the market remains vulnerable to the prevailing narrative, with the negative feedback loop only growing louder in recent sessions.

Oil Fundamental Analysis

China is easing lockdowns and mobility restrictions in Shanghai and considering more widespread easing, leading to higher oil prices. Though Brent is off weekly highs, it is still well-above weekly lows.

The growing threat of disruption to Russian crude exports continues to help oil sentiment, despite opposition to an EU-wide embargo from Hungary and a handful of other EU member states that remain heavily reliant on Russia.

News of unrest in Libya reminds supply-side risks, but Russia remains the focus.

And while more extensive than expected drops in US crude and gasoline inventories initially had a limited impact, this week’s US inventory data still screens bullish for oil.

But if US growth data continues to sour, oil prices could get caught up in the negative stock market feedback loop.

Gold Fundamental Analysis

Gold has turned higher as US yields slip and the US dollar sheds some of its safe-haven appeals due to weaker US growth data.

The dynamic in the gold market has changed for the first time in several months. Bullion prices have begun liberating themselves from the tendency to sell into economic destruction, similar to other commodities, and now appear to be acting as a safe- haven. With gold performing well as equities tumble, bullion could catch a short market by surprise if it can hold this pattern.

Friday’s Forex Follies

The safe-haven dollar is not so safe these days.

The US dollar is weaker as the curve is pricing in fewer hikes, and some are putting higher weight on recession probability.

So, the focus has turned from don’t fight the Fed to a policy mistake with hikes getting priced out along the US curve on poor data and higher recession risks. The Fed is leading the hiking cycle, so USD will also get hit first as hikes are repriced lower.

Rates market Technicals are also playing a role, with 10y yields topping out near 3%. The lower end of the range is now 2.70%, so some in the market think there can be a test of that level on the downside; hence gold has found some lustre.

China stabilizing would be a massive weight off the equity market’s shoulders. A couple of well-positioned areas could see a flip if there starts to be some better news from China.

From the G10 side, AUD has room to move higher if China can stabilize short term (NZD and CAD should benefit).

JPY remains a buy in a recessionary environment, as is CHF on SNB intervention talk. The ECB is raising rates into a perfect storm that will undoubtedly widen periphery spreads, making lower EURCHF screens brighter.

In Asia FX, the periphery would benefit from any easing of China concerns. Hence there has been some selling interest across $Asia pairing longs and initiating some tactical shorts on the China easing impulse. I think the undervalued MYR could be an excellent rally candidate with the BNM already hiking rates. And of course, the travel-sensitive THB is well on its way after the robust trade data, and a bounce in tourism will meld to offer the BoT room to hike rates to ward off imported inflation.

As we suggested on the China reopening bounce, it could turn the tide for the YUAN; it is seemingly doing that as there has been less USD buying the past few sessions while longs have started to give way to a strong domestic equity impulse.

However, the lower move is likely due to reports suggesting members of the Chinese Communist Party should shed overseas assets is likely contributing to the downdraft.

For a look at all of today’s economic events, check out our economic calendar.

S&P 500, Oil and Forex Analysis – Never Underestimate the Purchasing Power of the US Consumer

Global Macro and Stock Markets Analysis

While the market is still trading short-term impulses; however, arguably we are likely reaching peak Fed and inflation. That is coincident with the equity market running peak bearishness.

Remember that Fed fear has been the root cause of equity unrest.

But never underestimate the purchasing power of the US consumer as the solid retail sales print pushes back against the US recessionary fat tail and pricing out China’s extreme left tail(lockdown) should meld to support global equity markets, with the reopening of supply chains easing inflation concerns, at least over the short term.

That has allowed asset managers to pick through the wreckage of a 15% decline in the S&P in just four weeks.

Stability is most necessary for all the fundamental factors that could be cited as a trigger to buy back in. And there are tentative signs of that happening.

Oil Fundamental Analysis

While optimism around Chinese oil demand prevailed yesterday, the EU disagreeing on the makeup of a Russian embargo, could win today. The ” special ” summit on 30-31 May is the next opportunity to agree on such an embargo, so the lack of an EU Russian oil ban could limit top side ambition until then.

Beyond the near term, less awful news on China offers a nip in the tail in the form of much higher oil demand and prices, which is positive for producers, but harmful for consumers sentiment.

And with unaffordable prices at the pump, which are a by-product of demand exceeding supply, the Fed will be on a mission to raise rates to at least moderate the demand side of the economy, which could eventually filter through to a mild form of demand destruction where there could be a buyer strike rather than buyers splurge over US peak driving season.

FOREX Fundamental Analysis – Chinese Yuan

The IMF’s decision to raise the weighting of the RMB in its SDR basket by 1.36 ppt indicates that the RMB has steadily gained attraction as a global currency since the 2015 SDR review. And could encourage more reserve managers to do the same given the current weakness as the country is on the cusp of reopening.

The reopening plans can, of course, be knocked off track. Still, a renewed willingness to reopen reflects fewer new covid cases, which should open the door to more stimulus and support China’s equity market. And importantly for the Yuan, it should attract capital inflows.

Pricing out the extreme left tail for China should support global equity markets in the near term and reduce safe-haven demand in the FX Asia basket.

For a look at all of today’s economic events, check out our economic calendar.

Markets Remain in Fight or Flight Mode While Rolling the Dice on Recession Odds

Global Macro and Stock Markets Analysis

US equities fell .4 % in a choppy session to start the week with little change to the broader macro or recessionary narrative.

Markets remain in fight or flight mode while rolling the dice on recession odds.

Still, traders seem to be in the mood to stay bearish until proven otherwise. However, there is still a lingering risk- on tone despite horrific Chinese data.

Investors’ hopes remain elevated that yesterday’s worse than expected Chinese outruns could prove to be a ‘whatever it takes” moment, and local policymakers will step hard on the stimulus pedal.

Oil Fundamental Analysis

Oil prices are up near 2.5 % on a confluence of anticipated Chinese demand returning amid Russian supply concerns. But China’s covid slowdown is music to oil bull’s ears as the breadth of the shift is where the surprise lies.

In addition, Shanghai has announced a gradual reopening starting immediately. It aims to return to everyday life by June 1, so we should expect mobility to return to its usual post haste.

But importantly, this could mean more stimulus down the pipe as even a gradual reopening increases the prospects for policy easing.

China’s official institutions have been reluctant to enact an adequate stimulus program as the locked-down economy is not giving policymakers bang for their buck via the multiplier effect.

Oil investors will continue watching the China covid curve while playing the China rebound story through Oil futures and XLE.

FOREX Fundamental Analysis

Chinese Yuan CNH

Traders have moved off, at least this one has, the CNH/JPY competitive advantage trade as a motive to sell the Yuan. And are now looking at the typical RMB correlation associated with local equity markets.

While a depreciating RMB is theoretically positive for export-oriented firms, it is generally associated with lacklustre overall share market performances.

With a good chance, policymakers could use yesterday’s economic data low point as a watershed moment to release a flood-like stimulus once the economy opens. There should be a positive bounce in Chinese equities and possibly change the tide for USDCNH. But mainland stocks will need to do the heavy lifting, not the PBoC

Japanese Yen

For the yen, the tide may be starting to turn. The Japanese currency broke nine successive weeks of losses against the US dollar last week.

There has been a notable change in how the pair operates in the last week.

US rates had been behind the currency moves – pushing the US dollar higher against the yen, euro, franc, and Aussie.

Now the drivers are more technical. When rates go up and equities go down – the S&P 500 had fallen 6.4% since May 4 when the Federal Reserve lifted rates by 0.5 percentage points – dollar-yen is not rallying as much. Instead, it is now trending down.

Traders want to buy the yen – and the classic ‘risk-off’ hedge of holding yen calls. Again, this is rolling the dice on US recession odds which could cause a significant spill across the global markets.

For a look at all of today’s economic events, check out our economic calendar.

Equites Remain Buoyant, China Stimulus , Oil Breaks Out , Gold Digs In +FX ( CNH-AUD-GBP)

Global Macro and Stock Markets Analysis

After dipping in and out of the red last week, worrying that the Fed’s inflation targeting could bring about a recession, equity markets ended the week in a relief rally fashion, led by tech and other oversold sectors, after Chair Powell hinted that the Fed would not look to shock the markets with 75 bp rate hikes at the next two meetings. And expectations continue to increase for a sizeable policy response from Chinese authorities ahead of a gnarly set of April data this week. This expectation is acting as a tailwind to sentiment.

Chair Powell’s appearance Tuesday at a WSJ event will attract some attention – but the data docket will do most of the talking this week with all eyes on US retail sales.

Indeed, investors remain laser-focused on the macro picture, particularly on consumer-based recessionary guidepost.

Still, the 2000 Tech-Bubble Crash analog would suggest the market has reached a comparable point of repricing and is possibly attracting dip buyers. But that does not mean the bear market is over, especially with the recession on everyone’s mind. I do not think that mortal coil passes quickly with traders looking to sniff out any signs of economic slowdown like a heat-seeking missile.

And while investment returns should be weaker in this cycle and without complicating the matter, higher interest rates imply smaller contributions to valuation. But looking at the post-pandemic market purely through the binary lens of Growth versus Value is becoming less relevant; investors will be driven by a different set of macro conditions and priorities than in the past, implying they will use different investment styles just like they did coming out of the 2000 tech crash.

Still, I do not think this is an excellent climate for investors as the market continues to trade on very short-term recessionary signals. And it is very “noisy,” keeping intraday volatility high with 150–250-point swings is common. Indeed, this is the hallmark of a market filled with air pockets which have left more than a few investors licking their wounds.

And while we have not reached that “sell everything “capitulation point, I do not think you want to be on the wrong side of the handshake line on this call.

Oil Fundamental Analysis

Crude oil finished the week at the highest since March 25 as the market seemed more spooked by Russia turning off power flows into Finland, b, and that domino effect than the chatter of a Beijing lockdown.

The Covid situation in mainland China remains fluid, although expectations continue to increase for a sizeable policy response from the authorities ahead of April data this week. Just as Americans are gearing up for summer road trips (summer driving season), any China policy response is a boon for the bulls. Indeed, US gasoline futures contract climbed to its highest level on record, signalling more pain at the pump for US consumers and higher inflation, mind you, which should now fall under the FOMC’s watchful eye while trying to snuff out the inflation fires.

Oil sentiment turned bullish on Friday, possibly related to more positive steps suggested by the National Health Commission in incrementally opening up China’s economy within the country’s zero-covid framework.

Suppose China opens its major cities – even gradually – that increases the prospects for policy easing. China’s official institutions have been reluctant to enact a significant stimulus, with a locked-down economy not giving policymakers bang for their buck via the multiplier effect.

Gold Fundamental Analysis

Bonds started to go like equities last year, with value versus growth chopping around almost intraday. It is the same thing in rates with breakevens and reals. A massive gain in real rates has sent gold lower. Still, bullion is hanging on as the missing ingredient to send gold crashing through $1780 is an associated and significant decline in inflation expectations. Still, downward pressure is likely to linger in the near term, particularly if Chair Powell maintains a hawkish tone this week; however, gold could find a respite if US economic data turns sour.

FOREX Fundamental Analysis

Chinese Yuan CNH

On Friday, there is bullish sentiment in China’s equities and CNH, particularly related to more positive steps suggested by the National Health Commission in incrementally opening up the economy within the country’s zero-covid framework. In addition, the policy overseers took to the airwave with “China CBIRC warns against betting on one-way yuan move.” Being an official agency of the PBoC, traders will take notice of these smoothing efforts. I suspect

Australian Dollar

While China’s stimulus this week could support the AUD, the big fear is China leaving the door open to on and off lockdowns and giving less scope to the monetary and fiscal policy upon the reopening. The significant risk is Beijing’s lockdown, which veers the market back to recession risk.

Any recessionary repricing will trigger AUDJPY selling again, which is typically viewed as the G-10 go-to hedge when the sum of all fears hits.

British Pound

I think GBP could garner a lot of G-10 focus this week, and for all the wrong reasons, notwithstanding, the UK government is seemingly intent on adjusting the Northern Ireland protocol. Bond traders react to the BoE, sending more precise signals that it may soon approach its terminal rate as the UK economy heads toward a potential recession. Hence the UK yield curve had a massive and largely idiosyncratic repricing last week, where the belly has rallied a lot more than elsewhere.

The Good News Is US Stocks Were Little Changed. Bad News Is the Euro Is Getting Raked Over the Coals

Global Macro and Stock Markets Analysis

The good news is that US equities were little changed Thursday, S&P down 0.1% even as concerns about the instability in crypto markets intensify. The dollar index rose around 1%, its highest level since 2002, even as US10yr yields slipped again, down 7bps to 2.85%.

The mechanical reaction of US yields is typically the rudder that tends to stabilize wonky markets and seems to be doing its job into the weekend.

Lower US nominal yields have allowed the market’s beaten-down growth parts to play for a bounce via a short-covering rally.

But unfortunately for long-term investors, short-term signals are proving the most relevant at the moment.

The unwelcome news is that even as desensitized as the market has become to the general Russia/Ukraine carnage, some profound implications of the fallout from the fighting need to be closely monitored. Especially with the Euro getting raked over the coals after Russian gas flows to Europe via Ukraine fell by a quarter after Kyiv halted using a significant transit route, blaming interference by occupying Russian forces. Indeed, this is the first-time exports via Ukraine have been disrupted since the invasion.

European risk sentiment is getting mangled by news of Russia cutting gas supply in retaliation for sanctions. It is clear Russia wants to drive a political wedge between EU countries over gas, with the likes of Hungary pushing against any energy bans from Russia. At the same time, Poland has already turned the spigots off.

EUR has crashed through 1.05 and has even broken down through 1.04 on the back of the news. Indeed, this truly highlights the uncertainty as we advance with the threat and disruption of the Russian energy supply continue to muddy the water.

Of course, higher oil prices are just the tip of the iceberg, as overall, this is not a pretty picture for the European growth outlook. Still, it will have upward inflationary pressures as well – the EU will likely stick to the chorus of sooner normalization, but the view does remain very grim on the prospect of hiking rates into a perfect storm.

Oil Fundamental Analysis

Oil is finding support from supply concerns as Russia takes another step forward to weaponize energy. Lower Russian production would be a by-product making the market deficit even more expansive.

For oil market participants, the central issue is the forever changing EU news flows as the EU’s Russia energy spat is turning into a comedy of errors. Still, unfortunately, it has all the hallmarks of tragic comedy.

Over here in Asia, oil traders are constantly scouring headlines, looking for a glimmer of light at the end of China’s gloomy lockdown tunnel. Still, we continuously end up at square one with lower case counts weighted against the authorities doubling down on their zero covid policy.

The oil market is boisterous within a narrow $100-110 range making price discovery tricky and riding a trend wave next to impossible. I have just straddled the market, waiting for something to break.

FOREX Fundamental Analysis

USDAsia spot has been marching higher, despite stable and stronger CNY fixes relative to expectations this week. That suggests onshore USD demand, possibly related to portfolio outflows from China concerns.

JPY is getting interesting as the 15 % rise in USDJPY YTD has opened an enormous undervalued gap for what is typically perceived as a safe-haven currency. It looks attractive as US stocks suggest the economy is on the precipice of recession. Historically FX hedges for massive risk-off scenarios indicate that the YEN provides an excellent windbreak to the recessionary downdraft against a “stock down rates down” seismic shock scenario or a market backdrop consistent with recessionary pricing.

For a look at all of today’s economic events, check out our economic calendar.

It Was a Harrowing Month for US Equities – The FED Mission Creep

Global Macro and Stock Markets Analysis

It was a harrowing month for US equities that closed on a decidedly dour note Friday when stocks heeled over close to 4% lower in one of the most painful single-session routs since March 2020.

April was already poised to be Wall Street’s worst month since the pandemic struck fear into the heart of investors, so Friday’s carnage was an “insult to injury.”

The slippery slope to the broader tape can get steep when mega-cap tumbles because the “broad” market is not that broad. US equities live and die by a handful of names, and those favourite Wall Street placeholders were bearing the sell-off brunt.

It was certainly not hard to get the macro ball rolling downhill ahead of this week’s FOMC as Chair Powell could cement the view that 50 is the new 25, but more worrying for stock pickers, there are lots of QE to unwind. So, the question is, how much of the impact of the balance sheet runoff has stocks pulled forward.

Oil Fundamental Analysis

Oil is opening up a bit higher after Germany is in favour of laying the groundwork for a phased-in Russian oil ban. I do not think this is entirely updated news for the market, but it is crunch time for EU ministers to commit to action now or forgo the opportunity. Indeed, they have been kicking the can on this for a while, suggesting they want to embargo Russian Oil but lack a lasting backfill offset.

Oil remains supported as the EU appeared to progress on a Russian crude import ban. But further gains will be limited to weaker oil demand prospects from China due to the continued expansion of lockdowns and mass testing across the region.

While Friday’s late sell-off in NY was chalked up to a technical expiry collapse in the heating oil and diesel contract.

The EU is caught in a tricky situation while trying to figure out the solution to weaning off Russian energy dependency, avoiding an economic collapse and compensating Russia through higher energy prices on its remaining energy exports.

So, in the absence of an immediate EU total oil embargo, eliminating mobility restrictions in China is necessary to drive Oil out of its current range.

Forex Fundamental Analysis

US Dollar

Stocks lower, US dollar up while China’s zero covid policy is fueling the USD

FX risk sentiment remains shaky due to lockdowns and restrictions in China. The markets are digesting the implications for growth and the global supply chain amid concern central bankers are caught in an inconvenient situation with inflation sticky but activity data under pressure.

Risk sentiment has proved fragile and driven strong USD demand as the FED looks to embark on an extremely aggressive rate hike trajectory, with a 75 bp hike in July creeping into the picture.

Recent gains reflect two favourable traits of the US dollar personality, where rising concern about growth risks in Europe and China are fusing with increasingly hawkish Fed pricing. And the drawdown in global equities—typically supports the safe-haven Dollar.

For all its hawkish talk and all the market has adjusted to a much higher path for Fed funds, the FED is not getting in front of inflation expectations, the hiking path gets steeper, but weaker stock markets are the FOMC’s mission creep.

It is not easy to see what might turn these dynamics around over the short term.

Asia FX

Although we are entering the “golden week” and typically a low liquidity period for CNH, China remains in focus for obvious reasons.

Many non-FX entities were hedging equity and credit exposure via USDCNH, but the spot retraced after Politburo got underway and comments struck the right tone with markets. The strong rally in China stocks on Friday caused a plethora of hedgers to run for the exits. Still, with no change in domestic covid policy, the bias remains for the trend higher to continue.

For a look at all of today’s economic events, check out our economic calendar.

The Key Passage to Calmer Waters Is Getting Through Earnings Season Relatively Unscathed

US Markets Fundamental Analyis

US equities rose Thursday, S&P up 2.5%, with gains led by tech after solid earnings from Meta, NASDAQ up 3.1%. JPY broke through 130 against USD after BoJ kept policy on hold, a twenty-year low. US 10yr yields down 1bp to 2.82%.

The S&P 500 Index had its best session since early March on Thursday, reversing weekly losses, as investors grew confident that corporate earnings can endure rapid monetary tightening by the Federal Reserve.

One of the key passages to calmer waters in equities and lower bond volatility is getting through earnings season relatively unscathed. Last night was a modest step forward in that regard.

A big miss on US GDP, down 1.4%qoq saar in Q4, consensus looked for a 1% rise. But details lessen some of the pain: a considerable drag from net exports and a surprise drop in government spending. Still, final sales to private purchasers were up 3.7%, pointing to strong underlying demand.

While USD gets a bit of reprieve from its relentless march higher as US yields stabilize and fall slightly, I don’t feel the disappointing US Q1 advance GDP headline figure will derail Fed momentum overall.

The US dollar bulls will likely come up for air while factoring in risks for a downside surprise to their projections for US core PCE today. If that were to materialize, it would mark a more significant start to the decline in inflation expectation, drive down US yields and likely soften the US dollar. But it may not drift too far from its current axis due to growing downside risks elsewhere, particularly in China and the Eurozone, where RMB weakness and EUR downside continue, and a stronger USD is a tailwind.

Asia Markets Fundamental Analysis

In Asia, the Chinese Politburo will focus on spreading good cheer to Asian markets so expect China to show a more pro-growth policy tone in terms of covid restrictions, the housing market, internet regulation, and consumption boost.

Chinese President Xi’s call for an ‘all-out effort to boost infrastructure for economic stability helped both A- and H-share market sentiment. Traders are positioning for a potential upside ahead of today’s Politburo meeting and the long holiday.

But there are no quick fixes here. China’s property market will remain weak in 2022, with homebuyers lacking confidence in non-SOE developers after recent defaults and being concerned about job security and property prices. While the government looks to keep costs stable in Tier 1&2 cities, price-to-income ratios are among the highest in the world.

Against this backdrop, we should expect further easing to support the market, but significant moves are unlikely given the protracted lockdown scheduled to run through June. There is no point in throwing money at people who are scared to leave their apartment for one reason or another.

I expect more upside to USDCNH; with the Bank of Japan firmly committed to its YCC target via unlimited bond-buying, USDCNH could push higher. China is at a competitive disadvantage to Japan in third markets on a multi-month move higher in CNY/JPY.

With the PBOC also forced to be on an easing path, the similarities to the Bank of Japan have spooked the market and hence probably the main driver of the move above 6.65 in the absence of any other local news. As I mentioned last week’s weaker fix where the PBoC invisible hand wasn’t so hidden, core long dollar positioning looks attractive for a move towards 6.70 and possibly 6.80, but factor in the potential for PBOC measures to calm volatility.

Oil Fundamental Analysis

Russia’s decision to switch off natural gas supplies to Poland and Bulgaria spooked the European energy market and seemed to trigger a call to action by German policymakers.

Crude oil prices have been quietly grinding higher on the report Germany is no longer opposing a ban on Russian oil. Of course, the devil will be in the detail as the EU policymaker tries to engineer a response that will not compensate Russia for the lost EU barrel through higher oil prices. Not to mention all 27 EU governments must approve an oil ban.

If we thought the Fed had an impossible task, perhaps the EU oil puzzle comes in a close second.

Aisa’s focus could shift back to China, where more Covid-19 cases are reported, but policymakers increase screening to avoid Shanghai-type chaos. While the prospect of a further drop in Russian production continues to support.

Gold Fundamental Analysis

Gold traded a bit firmer overnight. A jump in oil prices drove inflation expectations slightly higher while US yields were relatively calm, with stocks stabilizing.

One of the reasons I have not bought this dip was the risk of a downside surprise for US core PCE today. If that were to materialize, it could mark the start of a significant decline in inflation expectations for the remainder of the year. The signal could be conflicting, driving both yields and inflation expectations lower. But with the bullion market singularly focused on inflation, it could hurt gold.

The market remains understandably cautious as the risk of near-term liquidation looms – some unwinding is perfectly understandable as investors adjust their gold exposure to further Fed tightening and real rates threatening to turn positive.

Does Tech Provide the Lifeline? China Credit Impulse? Oil Sanctions?

Global Macro and Stock Markets Analysis

US stocks finished higher in choppy trading, buoyed by a tech-name rally as 10-year yields slumped, which provided a relief conduit for growth stocks. Indeed, the tilt to the tape favoured growth over value as UST 10y yields fell.

The FOMC meeting scheduled for May 4 is expected to display a hawkish Fed that remains steadfast in bringing inflation back down to its 2% target; it is debatable how long of a reprieve growth stock will get.

The drawdown in China/Hong Kong continued triggered by ongoing economic weakness in Mainland. It turned contagious, with Covid concerns escalating to fears of a Beijing lockdown that spurred broader de-grossing globally, fueling concerns of global growth slowdown and for further supply-chain snarls to only exacerbate already rampant inflation.

But we have been down this bumpy Covid road many times before, and it is improbable that mainland powers do not have a flood-like policy contingency plan when lockdowns are removed.

In China, the credit impulse has been a good leading indicator of the PMIs. Once again, the PMIs are significantly weaker than implied by the credit impulse. If history is any guide, the PMIs may have a further downside as lockdown will extend through Golden Week but should recover sharply once restrictions are eased.

And while China property could shift out of the short seller’s gaze when lockdowns are eased, the steady drumbeat of online regulation catching up to innovation will continue to be painful.

Oil Fundamental Analysis

Crude prices are down at the start of the week due to concerns around Covid-19 outbreaks in China, leading to a more protracted lockdown. While a quick return of Libyan production also fueled the bears. Libya’s Oil Ministry said that the closed fields, shutting in >500kb/d of production, could reopen within days.

Given Omicron’s less-lethal footprint, traders had expected some easing of lockdowns before the Golden Week. And with this unlikely to happen, traders were then forced to revalue oil prices lower on a more protracted consumption slump than expected. China’s economy was quite normal last year. So, we are set to see abysmal consumption data post the Golden Week.

Still, reports are rampant that the EU will have some form of the Russian oil embargo in its sixth sanctions, according to EU Commission Executive Vice President Valdis Dombrovskis. While the details have yet to be agreed upon, the sanctions could be a gradual phasing-out of Russian oil or tariffs on exports beyond a sure price cap. And this continues to support the downside.

In addition, Macron has been vocal in calling for an escalation of sanctions against Russia, including a ban on oil and coal imports. On the back of a Macron election win, these calls should grow louder despite German reluctance.

Energy inflation hedges continue to dwindle with the CFTC data released on Friday showing that money managers cut their net long US crude futures and options positions by 15,963 contracts to 246,481 on April 19. Cleaner positioning is suitable for oil bulls as it can elevate downside risks

FOREX Fundamental Analysis

Japanese Yen and the BoJ Meeting

The US yields moved lower overnight, undoing much of last week’s move, on risk aversion related to China’s inability to contain covid cases (more lockdowns) and how this will impact global growth. Cross JPY selling was the main driver, with AUDJPY and EURJPY, in particular, getting hit. USDJPY topped out in the early Asian session near 128.80/90 before falling to a low of 127.89.

USDJPY opens today’s Asia session near 128.00/10, and support in USDJPY rests at 127.80/90 (overnight low) and 127.30/40 (200-hour MA). Buying dips remains the preferred way to play the pair despite the recent price action. It is unlikely the Bank of Japan changes tack at its meeting later this and, given next week is Golden Week in Japan, local USD buyers will need to get their USDs in before heading on holiday.

Even after Kuroda seemed to dismiss any chance of intervention with his remarks on Friday evening, the market remains wary of a downside. BOJ options climb steadily as the market adds a risk premium for the upcoming policy meeting. The USDJPY curve is now pricing an 80bp gap move. The market will be looking for any changes to policy rate forward guidance and inflation outlook adjustment in the medium to long term

PBOC Cuts Forex RRR Rate By 1%

The PBoC has cut the Forex RRR rate by 1% to 8%. This is the rate that governs firms foreign exchange reserve requirements, and the last move saw them hike it by 2% to 9% back in December 2021.

I think the PBOC FX RRR rate cut is a reaction o the increased volatility and the pace of the weakness. And I suspect the PBOC is still okay with a weaker CNH/CNY, but the FX RRR cut could put a lid on USDCNH speculative topside fervor for now, and we could trade within current levels for a bit.

Malaysian Ringgit

And easing of topside USDCNH momentum due to the PBoC RRR FX cut and a softening of US 10 y UST yields should offer the beleaguered MYR some relief today. By no means do I suggest donning the rally caps just yet, as we have a pregnant hawkish FOMC meeting lying in wait for any USD bears on the first week of May

Thai Baht

USDTHB spot is now trading at 33.10, near the highest level since mid-2017. The consensus view is that this is a combination of general risk-off sentiment, yield differentials, and glum China covid lockdown outlook (and the associated impact of the Tourism sector) weighing on THB. Hard to disagree.

But there were also $425 mn of dividend outflows last week. THB is most sensitive to periods when dividend flows are more considerable than $350 mn. Thailand companies will pay around $1.5 bn of dividends to non-residents in April-May this year. (That’s in the price now) I think THB longs as a tourism recovery play are getting close and would look to cross it with local low yielder TWD as opposed to typical funders like JPY or EUR a

Turnaround Tuesday

During periods of market fear, there is a typical inter-week pattern that stock markets often follow. Markets do not always follow this pattern, but they do follow it a surprising proportion of the time.

The most reliable part of this pattern is “Turnaround Tuesday.” Indeed, stocks tend to rip higher on Tuesday if they sold off the Thursday, Friday, and Monday before. It is a simple human pattern because when the news appears bad, traders get nervous into the weekend and sell some of their holdings on Friday. Then they read all kinds of adverse media reports about China’s lockdown, which scares them to sell more on Monday.

Investor selling pulls in momentum traders who go short on Monday and adds to the selling pressure. The shorts get squeezed into the Monday close, which triggers Turnaround Tuesday. Then, Tuesday comes, and there is nobody left to sell so short covering set in, and stocks go up.

For a look at all of today’s economic events, check out our economic calendar.

Russia: Record Current Account Surplus Disguises Longer-term Impact of Economic Sanctions

Russia’s current account surplus – a broad measure of the country’s trade, investment earnings and transfer payments with the rest of the world – widened to USD 58.2bn in Q1 2022 (Figure 1), equivalent to nearly 10% of the Central Bank of Russia (CBR)’s USD 609bn of international reserves as of 8 April (including sanctioned and frozen reserves), which are down from a record high of USD 643bn on 18 February, before the full-scale invasion.

The wider surplus reflects soaring revenue from Russia’s oil and gas exports – largely spared from international sanctions for the present.

Figure 1. Russia recorded its highest ever current account surplus since at least 1994

Source: Bank of Russia, Ministry of Finance of the Russian Federation, OPEC, Scope Ratings

Absent broader EU sanctions, Russia’s current account surplus could end the year above USD 200bn

Without broader EU sanctions of Russian oil and gas, Russia’s current account surplus could end the year well above USD 200bn, up from about USD 120bn in 2021, due to collapse of imports and the surging value of its commodity exports. This would essentially enable the CBR to rebuild a large segment of international reserves that sanctions have frozen.

Russia will speed up “de-dollarisation” of its reserves and foreign trade, including via increasing its exposure to Chinese renminbi, while maintaining exposure to euro. Russia currently conducts trade with China more in euro than in dollar, with EUR being the settlement currency with respect to half of Russian exports to China, compared with around one-third for USD.

We are yet to see the full impact of sanctions on the Russian economy

However, we are yet to see the full impact of sanctions and resulting consequences of the war on Russian foreign trade and the domestic economy, even if there is no near-term oil or gas embargo. First, sanctions are leading to a painful adjustment of imports for the Russian private sector, disrupting more than half of imported high-tech goods as well as a significant segment of imported machinery and equipment key for industrial production.

A loss of access to foreign technology weakens Russia’s already moderate medium-run growth potential, which we had estimated of around 1.5%-2% annually before the war’s escalation, while we expect Russian GDP to contract by at least 10% this year.

Secondly, an acceleration of European efforts to diversify energy imports away from Russia exacerbate medium-run economic challenges given lack of an ambitious government policy addressing the economy’s reliance on its energy export sector. The EU, which is, overall, Russia’s largest trading partner, recorded imports of Russian petroleum, natural gas and other related products of EUR 100bn last year. The EU’s plan to shed its dependence on Russian gas by 2030 could be brought forward – driven by German ambition to substantially cut dependence by 2024 – via diversification of gas supplies through increased liquefied natural gas and pipeline imports from non-Russian sources.

Full substitution of Russian energy exports to Europe is out of reach near term

We expect to see an acceleration of Russian efforts to counteract European measures partly through greater energy cooperation with China. Full substitution, however, is out of reach any time soon.

Importantly, today Russia does not have the infrastructure capacity to redirect pipeline gas from its west to the east. The capacity of Russia’s eight pipelines suppling gas to Europe is circa 220bcm/year, nearly six times that of its one pipeline to China, Power of Siberia, which is not operating at full capacity and is expected to reach only 38bcm/year by 2025.

In February 2022, Russia signed a 25-year agreement with China for supply of a further 10bcm of natural gas per year. Additionally, Russia is currently planning to develop the Power of Siberia-2 pipeline to deliver an extra 5 bcm/year of gas to China. The construction of the pipeline, however, is expected to conclude only by 2030.

Under this context, Russia’s demand to so-called “unfriendly countries”, including EU member states, to exchange dollar and euro for rouble to pay for Russian gas via a Russian bank reflects extension of a strategy to curtail reliance on western financial systems. This seeks to reduce risks to the Russian economy should accumulated gas revenues become subject to western sanctions in the future.

For a look at all of today’s economic events, check out our economic calendar.

Levon Kameryan is Senior Analyst in Sovereign and Public Sector ratings at Scope Ratings GmbH.

Stocks, Oil and Forex Analysis: This Market Trades a New Narrative Everyday

Global Macro and Stock Market Fundamental Analysis

On the whole, this market trades a new narrative every other day (and sometimes goes through four economic cycles in one session); this sell-off could all revert just as quickly as it has rolled over. Still, it does not feel like investors are in a rush to buy the dip or defend any technical territory just yet.

As the two-day rollover has been vicious, I would keep an eye on miners, considering investors have been constructive on this group given commodity supercycle views. I would watch the S&P500 names – Nucor, FCX, NEM – which have been among the worst performers the last two sessions. And you certainly do not want to be the last one on the dance floor if the commodity supercycle music stops.

So, where does this leave markets?

Real yields should remain the dominant macro variable of 2022 from any pro’s concern- it is remarkable how low they stay. I would expect traders to gravitate around a concept that real yields have further to rise – either because inflation expectations come down as growth expectations slow or further central bank hawkishness. The environment thus remains exceptionally challenging for risk appetite as long-duration assets are bound to feel the pinch.

Oil Fundamental Analysis

Commodities finished the soft across the board, and oil closed down 168bp on Friday.

For oil, reports that Chinese oil demand has fallen by the most since the Wuhan lockdown of 2020 reversed any thoughts of a weekend rally.

Other reports also indicate that Russian oil has started to find new ways to reduce the risk of a global shortfall., which is also weighing on sentiment.

There’s evidence of old commodities tricks at play with an increase in the number of tankers leaving Russia for “destination unknown.” Indeed, this is a telltale sign the oil is being taken to larger ships at sea and unloaded and comingled with other cargo blurring the lines. The circular nature of much of the energy economy and how displaced Russian crude is sold to somewhere like India can free up other supplies for western economies.

Thoughts of a commodities supercycle gradually give way to recession fears that are compounded by a Fed that continues to ante up rate hike rhetoric.

Forex Markets Fundamental Analysis

US dollar

I look for the US dollar to remain firm through the higher US yields channel and turn king during periods when the market focuses on slow global growth and triggers weaker risk sentiment.


Macron has regained his lead in the French polls, and the market is now pricing a July ECB hike. But Fed repricing has been even more aggressive, leaving EURUSD tracking rate differentials and the dollar benefiting from a very hawkish Fed.

British Pound

Not all inflation is the same. UK inflation could be three times the BoE’s target, but cost-push rather than demand-pull pressures are driving it; the UK consumer is already struggling with the higher cost of living, indicating the demand side of the economy is already waving the red flags.

The BoE has been open and transparent that it will raise rates further, but the market overestimates just how far that tightening will go. The terminal rate in the US could easily be 3.5%. In the UK, it is unlikely to be more than 1.5%.

Japanese Yen

Tokyo demand for USDJPY took the pair from 128.20/30 up to a high near 128.70 before sellers returned. This was the fourth time last week that the pair has topped out in the 128.70 zone, and this level remains critical resistance in the short term.

Media reports that Japanese Finance Minister Suzuki and US Treasury Secretary Yellen did discuss joint intervention to support JPY. The tone on the US side was one of “positive consideration,” sending USDJPY down to the overnight lows near 127.74, but dip buyers were waiting.

Japanese March CPI data showed prices increasing at the fastest pace in more than two years; however, this move was driven by energy and validated BoJ Governor Kuroda’s thesis that this is cost-push inflation (not demand-pull). Consequently, it is unlikely the BoJ will change policy near-term (unless it explicitly wants JPY to strengthen). It is also unlikely that the MoF will intervene at these levels, especially with the BoJ reaffirming its adherence to YCC.

Chinese Yuan Offshore

It is hard to pick a top. But if the PBoC gets uncomfortable with the pace of the move, which might cause some participants to back off. Indeed, this could be a messy correction lower. We saw profit-taking when we neared 6.55.

But none of the factors you would lay out for this move higher in USDCNH are different than what the market was arguing for months, so, interestingly, everyone piled in on this move last week, and it has so far worked out.

For a look at all of today’s economic events, check out our economic calendar.

Oil, Gold, EUR/USD, USD/JPY and USD/CNY Analysis – Retracement In Oil Prices Aided US Stocks

Global Macro Analysis

Although the tape is incredibly messy, US stocks were supported by a limited rise in real yields, stable earnings expectations and some retracement in energy prices.

The first-quarter earnings season kicks off next week, and, as always, Financials will get things started – almost a third of the XLF ETF reports. And with the Fed rolling out the rate hike policy cannons, it should be music to Bank stock investor’s ears.

Still, with inflation pressures surging, stock pickers will be looking for companies with solid pricing power relative to cost exposures. And I think this could be a key theme as we advance in 2022

But the significant offset here is recession fears, and concerns about a consumer slowdown could lead to broader drivers. I think investors will turn consumer data-dependent, weighing the dilemma of price inflation versus growth deflation.

Notwithstanding the fact, it has become a cliche that tightening monetary policy more aggressively at a time of cyclical uncertainty and slowing consumer demand increases recession risks.

Oil Fundamental Analysis

In the absence of new Russian energy sanctions, oil’s topside feels limited over the short term following the news that the IEA will collectively release crude from emergency reserves. Yet the dip below Brent $100 was only brief, and those expecting a bigger flush were likely disappointed.

I still think at some point, the sentiment-driven sell-off will give way, and fundamentals will reassert themselves, especially as more market participants start fretting about how will the US administration replenish the SPR drawdown.

Oil prices remain volatile amid concerns over Russian supply against the backdrop of slowing demand in China and a likely depressed US summer driving season due to higher prices at the pump.

Still, market deficits are likely to persist but only moderated by the accelerated strategic stock release from May to November and weaker demand growth.

The most significant bullish factor for oil is the continued decline in Russian exports via self or official sanctions. Still, more companies are committing to a ‘private sector embargo,’ including total winding down purchases by year-end. And In the court of public opinion, pressure is mounting on Brussels to act, and if that pressure valve pops and the EU sanctions Russian oil, we could see Brent Crude ( CO1) at $120 in a heartbeat.

Gold Fundamental Analysis

US inflation breakevens remain elevated, signalling to gold buyers that either the combination of rate hikes and balance sheet run-off already priced is insufficient or structural factors mean that the central banks will have a limited impact on inflation.

But gold could trade in an ever tighter range over the short term, with higher real yields offsetting any bullishness around inflation hedging.

FOREX Markets Fundamental Analysis

It was another tough weak for Eurozone as angry investors remained stuck in the fog of war.

Euro vs US Dollar

With the French presidential election this weekend, the market might be cautious about owning the euro, especially into the second round of voting on Apr. 24, as the incumbent Emmanuel Macron’s margin in polls has been shrinking over the past few weeks.

Curiously the euro is lower despite relatively hawkish ECB minutes that warn that a more extended period of above-target inflation would lead to an increased risk of expectations de-anchoring

But given the ECB board’s member’s record of inconsistencies, most took these minutes with a big pinch of salt.

US Dollar vs Japanese Yen

Whether it’s cross JPY selling (negative risk sentiment), lower US yields, or lower energy prices, nothing seems to be able to keep USDJPY down. The apt analogy appears to be a beach ball underwater – it can’t stay down.

US Dollar vs Chinese Yuan

With CPI inflation much lower than in the western world, the PBoC and the government have scope to cut interest rates and incentivize consumer spending via fiscal transfers to alleviate the costs of the country’s zero Covid strategies. This divergent strategy, just as the Fed is about to unleash the monetary policy and QT bazookas, could lead to the cnh underperformance.

For a look at all of today’s economic events, check out our economic calendar.

Asia Sentiment a Bit Fragile amid Shanghai Covid Concerns

Weaker bond markets are setting records with the benchmark UST indices, which are the worst on paper at this stage in data going back to 1972. Barring an end-of-month rally, Q1 2022 will underperform the weakest quarter on the record set in Q1 1980. The cross-asset reaction to higher yields has been a collective shoulder shrug in sharp contrast to the equity market drawdowns seen earlier this quarter

Significant month and quarter-end rebalancing following the steepest YTD drawdowns in bond markets in decades could push implied rates and equity market volatility higher this week and next. But with CPI inflation yet to peak in the major economies, higher highs in yields look set to follow in Q2 beyond any near-term rallies.


Oil fell at the NYMEX open as China’s worsening virus resurgence raised concerns about demand in the world’s biggest crude importer.

Global markets seem to be a bit nervous about the effectiveness of China’s zero-tolerance policy towards covid and the potential for more demand and supply chain disruptions as we might be only dealing with the tip of the iceberg.

Oil prices remain supported in part because of the unexpected disruption to crude flows via the CPC export terminal in Kazakhstan. Severe weather caused damage to two of the terminal’s three mooring systems, and the resulting halt to loadings impacts around 1mb/d of crude flows – significant in the context of already-tight markets. Repairs will reportedly take at least one month, adding to near-term supply uncertainty and supporting oil prices.

More companies are committing to a ‘private sector embargo,’ including total winding down purchases by year-end, with many companies not willing to ink new deals. Public opinion and government coercion make it difficult to envision these companies restarting purchases.

Although March vessel loadings of Russian crude and products may be little changed, reflecting deals struck in February, the disruption to April loadings and pipeline exports could be significant relative to the market’s current state expectations.


The offsetting narrative of lower oil and a coronavirus surge in China ( inflationary impact of a supply chain disruption) has seen relatively neutral but with a soft sell bias at the open of gold trade.

With war rather than peace looking more likely for the foreseeable, gold remains well supported on dips. And with oil prices more likely to stay higher for longer, inflation and the real possibility of stagflation hitting the global economy continues to support gold.

Hence, gold investors may still think the Fed’s “whatever it takes” moment is more bark than bite, so they continue to buy gold in dips.


USD/CNH is testing 6.3900 this morning in Asia after a spike in covid cases reported in China. The surge raises the chances that the PBoC will need to cut interest rates more aggressively than priced. This creates an obvious policy divergence trade between the PBoC vs the FED

Oil Prices Keep Falling. Is It Time to Get Long on Black Gold?

Oil prices kept falling this week, driven by potential progress in Ukraine-Russia talks and a potential slowdown in the Giant Panda’s (China) economic growth due to epidemic lockdowns in some regions where a surge of Omicron was observed.

As I mentioned in my previous article, India considers getting Russian crude oil supplies and other commodities at a reduced price by settling transactions through a rupee/rouble payment system. Meanwhile, we keep getting rumors – notably reported by The Wall Street Journal – that Saudi Arabia and China are also currently discussing pricing some Saudi oil exports directly in yuan. The Chinese are actively seeking to dethrone the dollar as the world’s reserve currency, and this latest development suggests that the petrodollar is now under threat.

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US Dollar Currency Index (DXY) CFD (daily chart)

The recent correction in crude oil, happening just seven days after reaching its 14-year highs, might show some signs that the conflict in Ukraine will slow down consumption. On the other hand, if Iranian and Venezuelan barrels flooded the market, we could see crude oil, petroleum products, and distillates turning into new bear markets.

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WTI Crude Oil (CLJ22) Futures (April contract, daily chart)

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Brent Crude Oil (BRNK22) Futures (May contract, daily chart)

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RBOB Gasoline (RBJ22) Futures (April contract, daily chart)

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Henry Hub Natural Gas (NGJ22) Futures (April contract, daily chart)

That’s all folks for today – happy trading!

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Thank you.

Sebastien Bischeri
Oil & Gas Trading Strategist

* * * * *

The information above represents analyses and opinions of Sebastien Bischeri, & Sunshine Profits’ associates only. As such, it may prove wrong and be subject to change without notice. At the time of writing, we base our opinions and analyses on facts and data sourced from respective essays and their authors. Although formed on top of careful research and reputably accurate sources, Sebastien Bischeri and his associates cannot guarantee the reported data’s accuracy and thoroughness. The opinions published above neither recommend nor offer any securities transaction. Mr. Bischeri is not a Registered Securities Advisor. By reading Sebastien Bischeri’s reports you fully agree that he will not be held responsible or liable for any decisions you make regarding any information provided in these reports. Investing, trading and speculation in any financial markets may involve high risk of loss. Sebastien Bischeri, Sunshine Profits’ employees, affiliates as well as their family members may have a short or long position in any securities, including those mentioned in any of the reports or essays, and may make additional purchases and/or sales of those securities without notice.


3 Major Market Themes (and Potential Winners) for 2022

Last year, risk assets didn’t seem to have a care in the world.

Roaring inflation? No worries.

Central banks pulling back stimulus? So what?

Delta and Omicron variants? Life goes on.

Despite all of those seemingly worrying events, risk appetite demonstrated a remarkable resilience to overcome anything that was thrown in its path. Just look at how the S&P 500 posted 70 new record highs on the way to claiming a 27% advance for 2021.

Still, markets could yet face a year of reckoning in 2022.

Here are three main themes that investors and traders would have to contend with and also the potential winners to look out for:

  1. Stubborn Inflation

In recent months, the prices of goods and services in major economies have skyrocketed (as of Nov 2021):

  • US: fastest inflation since 1982
  • UK: fastest inflation since 2011
  • Europe: record high inflation!

Surging consumer prices are also a major consideration for investors who must choose which asset class could best protect their wealth and purchasing power against the erosive effects of inflation.

Potential winner: Gold

This precious metal is traditionally seen as a way to preserve one’s wealth (hedge) against inflation. However, gold also has an inverse relationship with the US dollar and US Treasury yields (i.e. when the dollar goes down, gold goes up, and vice versa).

In short, gold could have a stellar 2022 if inflation continues surging and the dollar/Treasury yields are kept in check.

Gold daily chart

2) Fed rate hikes

The US Federal Reserve is the most important central bank in the world. And one of their main jobs is making sure that consumer prices don’t rise too much too fast.

The main way they can keep inflation in check is by raising interest rates.

As things stand, the Fed has indicated that they could hike rates 3 times in 2022.

Potential winner: US dollar

Historically, higher US interest rates typically means a stronger greenback. This is because higher interest rates also usually mean higher yields for US Treasuries, prompting global investors to send more of their money towards US assets.

This relationship is set to play out once more in 2022, unless the Fed has to hold back on rate hikes for fear of triggering a recession.

US Dollar Index, daily chart

3) New Covid variant?

We’re entering the third year in this battle against Covid-19. So far, the global economy seems resilient enough to weather the Delta and Omicron variants.

But what if we see a new variant of concern that winds back the pandemic clock?

Pi is the next letter in the Greek Alphabet after omicron. Unless the WHO decides to skip a couple of letters again (like they did before deciding on Omicron), the world will be hoping that the ‘life of pi’ won’t bring us back to lockdowns that shutters the world economy once more.

However, if this tragic turn of events does become reality in 2022 …

Potential winner: Swiss Franc

The Swiss Franc (CHF) is considered a safe haven currency, meaning to say that investors flock to it during times of heightened fear. Recall how CHF was one of the best-performing G10 currencies against the US dollar in 2020, and the Swiss franc also had an annual gain versus all other emerging-market currencies that year.

In a major risk-off event, or a new variant of concern that upends the global economic recovery, expect safe haven currencies including the CHF to be well sought after.

USD/CHF Weekly Chart

Of course, the outlook for financial markets is too vast to be limited to just three themes. So here are five other events to keep an eye on that could rock various asset classes:

  • Brexit risks: GBP, FTSE 100
  • Contagion risks from China’s troubled property sector: CNH, Hang Seng index
  • US President Biden’s spending plans: US dollar, US stocks
  • 2022 US midterm elections (November): US dollar, US stocks
  • Geopolitical tensions between major economies: Safe havens – gold, CHF, USD

Whatever 2022 may spring on the world, it also promises plenty of opportunities for traders and investors.

Hence, it remains vital that market participants stay sharp and keep tabs on major themes that could sway asset prices over this calendar year.

By Han Tan Chief Market Analyst at Exinity Group

Disclaimer: The content in this article comprises personal opinions and should not be construed as containing personal and/or other investment advice and/or an offer of and/or solicitation for any transactions in financial instruments and/or a guarantee and/or prediction of future performance. ForexTime (FXTM), its affiliates, agents, directors, officers or employees do not guarantee the accuracy, validity, timeliness or completeness, of any information or data made available and assume no liability as to any loss arising from any investment based on the same.

2022 Global Economic Outlook: Covid-19, Structural Inflation, Monetary Tightening Challenge Global Outlook

Explainer video: Scope Ratings introduces its 2022 Global Sovereign Outlook

Download Scope’s 2022 Sovereign Outlook (report).

Entering 2022, new variants of Covid-19, elevated inflation, and withdrawal of fiscal and monetary support present risk for the robustness of recovery. GDP is seen, nevertheless, continuing to grow above trend over 2022 of 3.5% in the US, 4.4% in the euro area, 3.6% in Japan and 4.6% for the UK, even if, in most cases, normalising to a degree from elevated early-recovery growth of 2021. China is seen growing nearer trend of 5%.

Amid an uneven recovery, we see momentary slowdown over Q4 2021 and Q1 2022 across many economies, if not in some cases temporary output contraction, as countries of Europe reintroduce generally lighter restrictions on basis of renewed rise in Covid-19 cases, including those associated with a new Omicron variant. But we see economic rebound regathering traction by the spring of 2022.

As expected, full economic normalisation has remained vulnerable to renewed introduction of restrictions as transmissible virus variants challenge public-health systems, though we see severity of virus risk for economic recovery continuing to moderate with time as governments adopt more targeted responses, virus becomes more transmissible but less lethal, and businesses and people adapt ways of doing business. Nevertheless, risk to the 2022 outlook appears skewed on the downside.

More persistent inflation, even as it begins to moderate, supports increasing monetary policy divergence

Inflationary pressure is likely to remain more persistent than central bank projections, running above pre-crisis averages even after price changes begin to moderate by next year. This is likely to compel a continued divergence of monetary policy within the globe’s core economies, with associated risk of crystallisation of latent debt and financial-bubble risk as central banks pull back.

This is especially true as regards the UK and the US, where inflation might continue testing 2% mandates, although much less the case for Japan of course, with the euro area somewhere in between with inflation potentially remaining under 2% over the long run.

By end-2022, policy rates of leading central banks are expected to similarly diverge: remaining on hold with respect to the ECB and the Bank of Japan but with rate hikes next year from the Bank of England and Federal Reserve. The ECB is seen halting the Pandemic Emergency Purchase Programme (PEPP) next year but adapting PEPP and/or other asset-purchases facilities to retain room for manoeuvre and smoothen transition in markets.

Higher inflation holds both positive and negative implications for sovereign credit ratings

Higher and more persistent inflation holds both positive and negative credit implications as far as sovereign ratings are concerned. Somewhat higher trend inflation supports higher nominal economic growth, helping reduce public debt ratios via seigniorage, and curtails historical deflation risk of the euro area and Japan. However, rising interest rates push up debt-servicing costs especially for governments carrying heavy debt loads and running budget deficits. Emerging economies, with weakening currencies and subject to capital outflows, are particularly at risk.

Substantive accommodation from central banks has cushioned sovereign credit ratings over this crisis, so any scenario of much more persistent inflation limiting room for monetary-policy manoeuvre is a risk affecting credit outlooks. Bounds in central bank capacity to impede market sell-off due to high inflation compromising monetary space may expose latent risk associated with debt accrued in past years.

Monetary innovation during this crisis has supported credit outlooks

As many central banks tighten monetary policy amid policy divergence, peer central banks that might otherwise prefer looser financial conditions may see themselves compelled to likewise remove some accommodation, otherwise risking currency depreciation. At the same time, with governments dealing with record levels of debt and central banks owning large segments of this debt, “fiscal dominance” may coerce moderation in speed of policy normalisation.

Monetary innovation over this crisis such as flexibility made available in ECB asset purchases supports resilience of sovereign borrowers longer run, assuming such innovations were available for re-deployment in future crises.

Emerging market vulnerabilities entering 2022, while ESG risks becoming increasingly substantive

Emerging market vulnerabilities are a theme entering 2022, amid G4 central bank tapering, geopolitical risk, and a slowdown of China’s economy. Debate heats up furthermore during 2022 around adaptation of fiscal frameworks for a post-crisis age, with potentially far-reaching implications as far as sovereign risk. Environmental, social and governance (ESG) risks are becoming increasingly significant – presenting opportunities and challenges for ratings.

Sovereign borrowers with a Stable Outlook make up presently over 90% of Scope Ratings’ publicly rated sovereign issuers, indicating comparatively lesser likelihood of ratings changes next year as compared with during 2021, although economic risks could present upside and downside ratings risk. Only one country is currently on Negative Outlook: Turkey (rated a sub-investment-grade B).

For a look at all of today’s economic events, check out our economic calendar.

Giacomo Barisone is Managing Director of Sovereign and Public Sector ratings at Scope Ratings GmbH.