The Fed may not be able to make a "soft landing" on the economy. France re-elected its president

After Powell's hawkish speech last week, analysts predict an almost 100% chance of a double interest rate hike in May, June, and July. At the same time, Powell has raised doubts that the Fed will be able to overcome inflation without throwing the economy into recession. This situation frightened investors, who began to sell-off at the end of last week. At the closing of the stock exchange on Friday, the Dow Jones index (US30) decreased by 2.82% (-1.74% for the week), and S&P 500 (US500) lost 2.77% (-2.60% for the week). The NASDAQ Technology Index (US100) fell by 2.55% on Friday and ended the week with a loss of -3.60%.

Now the big question is: can the earnings season pick up indices based on this recessionary sentiment? That's where analysts disagree. It should be noted that markets set future scenarios at the current price. Therefore, the main indices fall only from rumors. But the real data will not show a decline, and any dovish forecast will be considered positive by the market. So, if the Fed officials don't say about an aggressive rate hike this week and the corporate earnings are better than expected, the indices might jump impulsively. Nearly 180 companies in the S&P 500, which are worth about half the market value of the benchmark index, are expected to release their results this week, including the four largest US companies by market capitalization: Apple, Microsoft, Amazon, and Google.

Major European indices were trading lower on Friday. German DAX (DE30) lost 2.48% on Friday (+0.31% for the week), French CAC 40 (FR 40) fell by 1.99% (+0.36% for the week), Spanish IBEX 35 (ES35) decreased by 1.84% (+0.29% for the week), British FTSE 100 (UK100) lost 1.39% and ended the week as the leader of falling with -0.78%. UK PMI data showed steady growth in March as further recovery from the COVID-19 restraint helped offset the negative factors. However, the war in Ukraine led to an unprecedented price increase and drove business confidence to a year-and-a-half low. Contrary to the consensus forecast, the Eurozone economy started the second quarter stronger than expected. Nevertheless, weakness in the manufacturing sector is a major concern, as it indicates that the economy is not operating at full capacity. In addition, the ever-increasing cost of living indicates that service sector growth may decline sharply once the initial boost caused by the economic opening fades, especially if business confidence is not restored. Business expectations in Europe for next year have risen from a 17-month low. However, confidence remains low as fears of war in Ukraine, rising prices, and the lingering effects of the pandemic do not inspire optimism. All these factors directly and indirectly put pressure on ECB policymakers, who are increasingly inclined to a more hawkish stance.

The second round of presidential elections took place in France yesterday. Incumbent President Macron (58.54%) won the election against Le Pen (41.46%), who gained record votes for the far-right. After the election of Emanuel Macron as President of France for a second term, protests erupted in France, and police used tear gas in Paris.

The situation in the oil market remains very uncertain. On the one hand, Russia's invasion of Ukraine, with all that entails, including a possible ban of Russian oil to Europe, suggests that oil prices should only rise. On the other hand, the restrictions imposed in Shanghai and the plans of the US and allies to release strategic reserves to the market prevent oil prices from rising. It is difficult to answer how the situation will develop further. Most analysts believe that oil prices and the energy sector will decrease shortly as the US Fed will tighten its monetary policy aggressively. This will increase the Dollar index, which will put negative pressure on oil quotes, as the main payment for oil supplies is made in US dollars.

Gold and silver, as well as platinum and palladium, were under price pressure late last week. That is not surprising, as any verbal intervention to raise interest rates more aggressively will cause the dollar index to spike and raise US Treasury yields, which is bad for precious metals. At this point, there are no fundamental factors indicating that precious metal prices will rise. And the general rule, "buy gold when inflation is high," is only temporary speculative.

Asian markets traded flat last week. Japan's Nikkei 225 (JP225) gained 1.02% over the week, Hong Kong's Hang Seng (HK50) fell by 3.84% over the week, and Australia's S&P/ASX 200 (AU200) closed with -0.08% over the week. Private sector output in Japan and Australia rose in April as the easing of COVID-19 supply disruptions domestically helped boost business activity. However, external events, such as the war in Ukraine and COVID-19 restrictions in China, have exacerbated supply chain problems, leading to longer lead times and increased price pressures for companies in both Japan and Australia. Companies in both countries also expressed concerns about rising inflationary pressures on business, leading to another drop in business confidence early in the second quarter. The annual inflation rate in Singapore increased from 4.7% to 5.4%. This is the highest value since 2012. The core consumer price index, excluding food and gasoline prices, increased to 2.9% in March from 2.2% in February.

In the commodities market, by the end of the week futures on lumber (+5.55%), gasoline (+5.49%), orange juice (+3.85%), WTI oil (+3.55%), Brent oil (+3.33%), natural gas (+2.98), corn (+2.47%) and wheat (+2.09%) showed the biggest gains at the end of the week. Sugar (-6.08%), platinum (-5.39%), cocoa (-4.94%), copper (-2.99%) and silver (-2.55%) futures showed the biggest drops.

Main market quotes:

S&P 500 (F) (US500) 4,271.78 −121.88 (−2.77%)

Dow Jones (US30) 33,811.40 −981.36 (−2.82%)

DAX (DE40) 14,142.09 −360.32 (−2.48%)

FTSE 100 (UK100) 7,521.68 −106.27 (−1.39%)

USD Index 101.12 +0.54 (+0.54%)

• – Singapore Consumer Price Index (m/m) at 08:00 (GMT+3);
• – Eurozone Germany Ifo Business Climate (m/m) at 11:00 (GMT+3);
• – Canada Boc Gov Macklem Speaks at 18:00 (GMT+3).

by JMarkets, 2022.04.25

This article reflects a personal opinion and should not be interpreted as an investment advice, and/or offer, and/or a persistent request for carrying out financial transactions, and/or a guarantee, and/or a forecast of future events.