Analysis of the Global Macroeconomic Environment and Stock Markets
US markets were little moved in thin trade Monday, with the S&P 500 remaining unchanged. The bond sell-off continued, with US 10-year rates rising 3 basis points to 2.85 percent, their highest level since December 2018.
Bullard of the Federal Reserve "would not rule out" a 75bp rate hike, but notes that this is "not the base case." According to the Taylor rule, 3.5 percent is the "minimum neutral rate."
The US dollar receives support from the Fed rate rise channel. Several dovish-leaning officials expressed support for a 50bp raise in May last week, while March's weaker inflation data did not dramatically alter policymakers' assessments of the tightening trajectory, implying that several fifty-bp Fed hikes remain the market's basic case. And the fact that Bullard is discussing a 75-bp raise indicates that other hawks are on the same page.
Q1 profits are on everyone's mind, with bellwether prints beginning to trickle in this week.
Equities continued to trade in a range, but the tape is more attractive for sellers following last week's big growth underperformance. Additionally, investors feel that the path of least resistance remains lower due to the continued inflation shock, imminent quantitative tightening, and dwindling fiscal stimulus.
Over in Asia, the sole ray of hope for Chinese shares is the current state of investor confidence and positioning.
One of the most serious issues is that finding dissenting voices on the global march toward recession is becoming increasingly difficult. The economy's negative is ubiquitous, and this alone can drive stock pickers away.
Fundamental Analysis of Oil
Oil had a strong overnight performance, but we are still in a tractor pull between global supply shortages and China's severe demand squeeze.
On a more optimistic side, Shanghai is aiming for a lockdown turning point by Wednesday, despite the outbreak's apparent spread to further locations. However, restoring mainland cities is important for a sustained economic oil that sustains oil demand.
Supply fears following Libya's closure of its largest oil field Monday and warning of additional outages as protests against the prime minister take place at the facility continue to demonstrate how bullishly reactive oil markets have become to supply shocks. And, without a doubt, more are sure to follow, shedding light on the growing global supply imbalance.
Given public opinion, the EU seems increasingly likely to implement a phased-in embargo on Russian oil, and this concept alone should be sufficient to keep oil bids on dips.
If the EU moves up with an oil embargo, it will be difficult for US oil to make up for the EU's deficit.
Fundamental Analysis of Gold
Fed Bullard dampened the rise overnight by hinting he would not rule out a 75-basis point move.
Despite the more hawkish Fed driving 10-year Treasury yields higher and the US currency stronger, the protracted Ukraine war narrative and the threat of EU penalties on Russian oil should keep gold bids on the defensive.
Gold immediately benefits from the inflationary repercussions of the Russia-Ukraine conflict, which are currently more significant than direct military events in the market.
Fundamental Analysis of the Forex Market
The US Dollar versus the Japanese Yen
The BoJ's verbal intervention facilitated the purchase of USD/JPY at more favorable rates. With increased oil prices to begin the week, the USDJPY has risen to 127. Still, in my opinion, we are edging closer to intervention area, and for those seeking to hedge against that possibility, now may be an opportune opportunity to leg in.
The Bank of Japan and government speakers have reached a point where verbal intervention amounts to little more than offering bulls of the USDJPY stronger buying levels. If the BoJ is serious about reversing the JPY's upward trend, it should abandon the intervention channel and begin implying rate hikes or adjusting the YCC to demonstrate a wider tolerance for domestic yields rising.
A weaker JPY, greater hedging costs, increased volatility, and a rise in Japanese domestic yields mean that US fixed income is less appealing to Japanese investors. Thus, despite the start of the Japanese fiscal year, it is prudent to anticipate lower demand, which implies that there may be some interest to buy JPY on repatriation flows. Bloomberg reported last week that Japan had repatriated about JPY 1.7 trillion in foreign debt.
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