Macroeconomic Analysis of the World
Although the tape is exceedingly choppy, US stocks were aided by a little increase in real rates, solid profit expectations, and a fall in energy prices.
Next week marks the start of the first-quarter earnings season, and as is customary, Financials will lead things off – nearly a third of the XLF ETF reports. And with the Fed unleashing the rate hike cannons, this should be music to the ears of bank stock investors.
Nonetheless, as inflationary pressures intensify, stock pickers will choose companies with strong pricing power in relation to cost exposures. And I believe this might be a major trend as we move forward in 2022.
However, there is a strong counterbalance here in the form of recession fears, and concerns about a consumer downturn could result in broader drivers. I believe investors will become more reliant on consumer data as they consider the trade-off between price inflation and growth deflation.
Despite this, it has become a cliche that aggressively tightening monetary policy during a period of cyclical instability and weakening consumer demand increases the likelihood of recession.
Fundamental Analysis of Oil
Oil's topside feels constrained in the short term in the absence of further Russian energy penalties, following reports that the IEA will collectively release crude from emergency stocks. However, the slide below $100 for Brent was temporary, and those anticipating a larger flush were likely disappointed.
I continue to believe that the sentiment-driven sell-off will eventually give way and fundamentals will reassert themselves, particularly as more market participants become concerned about the US administration's ability to refill the SPR decline.
Oil prices remain erratic due to concerns about Russian supplies, a weakening Chinese economy, and a predicted decreased summer driving season in the United States due to rising gasoline prices.
Nonetheless, market shortfalls are anticipated to persist, though they will be mitigated somewhat by the expedited strategic stock release from May to November and weaker demand growth.
The primary bullish driver for oil is the continuous fall in Russian shipments as a result of self-imposed or official sanctions. Nonetheless, more businesses are committed to a 'private sector embargo,' which includes a complete wind-down of purchases by year's end. And in the court of public opinion, pressure is building on Brussels to act, and if that pressure valve pops and the EU bans Russian oil, Brent Crude (CO1) may hit $120 in an instant.
Fundamental Analysis of Gold
US inflation breakevens remain elevated, indicating to gold purchasers that either the already-priced combination of rate hikes and balance sheet run-off is insufficient, or that structural issues limit central banks' ability to influence inflation.
However, gold may move in a more narrow range in the short term, with rising real yields canceling out any bullishness on inflation hedging.
Fundamental Analysis of the Forex Markets
Another difficult week for the Eurozone, as enraged investors remained trapped in the fog of war.
Euro vs. United States Dollar
With the French presidential election taking place this weekend, the market may be hesitant about owning the euro, particularly heading into the second round of voting on Apr. 24, since incumbent Emmanuel Macron's poll lead has been eroding in recent weeks.
The euro has depreciated despite relatively hawkish ECB minutes warning that a prolonged period of above-target inflation would heighten the risk of expectations de-anchoring.
However, considering the ECB board members' track record of inconsistency, the majority of observers viewed these minutes with a grain of salt.
The US Dollar versus the Japanese Yen
Whether it's cross-JPY selling (a sign of negative risk sentiment), lower US rates, or lower energy costs, nothing appears to be able to keep the USDJPY down. The most suitable parallel appears to be a beach ball submerged - it is incapable of staying down.
The US Dollar versus the Chinese Yuan
With CPI inflation far lower than in the developed world, the PBoC and the government have the option of cutting interest rates and incentivizing consumer spending through fiscal transfers to offset the costs of the country's zero COvid efforts. This different strategy, which comes as the Fed prepares to unleash its monetary policy and quantitative easing bazookas, could result in cnh underperformance.
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