Markets ended the week on a more positive note, after a wild sell-off into the bear market territory. The key issue behind the volatility is that central banks are set to aggressively raise rates (Front Load) to lower demand and tame inflation. But the situation is more complicated than that, with most of the issues coming from supply side disruptions, due to Covid and the war in Ukraine.
The likelihood of the FED being able to bring inflation down whilst avoiding a recession is going to be a tough juggle. Many investors are still very concerned that the US economy will have a hard landing if the FED tightness too much too quickly. The FED doesn’t meet again until the 14th of June, they are expected to raise rates but .50% again. This will likely continue to weigh on sentiment in the coming months.
The buying in the US market late last week was overdue with most technical short-term indicators being an oversold condition. At this stage, we don’t expect the market to recover as much as it did last time. If this is a bear trend then we are now on a counter-trend move, with the SP500 around 4% away from the down trend line.
The XJO is expected to open higher this morning following a strong night of buying in the U.S on Friday and their positive futures this morning.
We should open just above 7,100, which means we may go on to test the key resistance today at around 7,150 to 7,200. This rally has been expected and warranted considering the selling we have seen the past week or two – particularly in the U.S. It is important to remember that a feature of a downtrend is lower peaks, meaning it is normal to see buying in a bear market – at some point, things look too cheap in the short term.
This week is filled with economic data:
We have Industrial production numbers from China at 12:00pm today. It is expected to drop significantly due to lockdowns. Tonight, we also have the Bank of England hearings. This is noteworthy considering their last statement shook markets with the prospect of stagflation. Tomorrow night we have retail sales from the U.S and On Wednesday Powell will speak and hopefully keep markets confident. Following that, on Wednesday night European CPI will be released, further developing the narrative around global inflation and monetary policy. On Thursday we have local unemployment numbers and on Friday we have existing home sales from the U.S.
US shares flew higher on Friday, with each of the three major indices taking strong legs into the green. The rebound of the NASDAQ, which had been the most heavily punished index was particularly impressive, as it rose nearly four percent on the day. The strength was likley on the back of an overcorrection to the downside across the past few weeks, but it was likely helped by an economic report showing that US import and export prices grew at a slower rate than expected in April, which may have moderated inflation and interest rate expectations.
Every major sector fo the SP500 closed in the green on Friday, with Discretionary, Technology, and Energy stocks faring the best of all. These are the stocks that had been battered down the most, so their extreme strength is perhaps unsurprising.
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