Swissquote Bank: All eyes on Powell

Swissquote Bank: All eyes on Powell

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By Ipek Ozkardeskaya, Senior Analyst, Swissquote Bank

US equity markets kicked off the short trading week with a bang. Major US indices jumped more than 2% yesterday with Nasdaq leading gains with a 2.50% advance in the session. Tesla gained 9.35% to close the session above the $710 level and FAANG stocks gained 1.80%.

But the gains may not last as the Jerome Powell’s semiannual testimony could turn the market mood sour again as the Fed Chief is expected to reiterate his strong commitment to fighting inflation even if it means slower economy and a softer jobs market.  

Joe Biden said earlier this week that he doesn’t think the recession is inevitable, but Goldman upped its recession expectation from 15 to 30%, and Morgan Stanley said that the S&P500 must drop another 15-20% to fully reflect the scale of contraction.  

Therefore, yesterday’s rally in stocks could be another dead cat bounce, and we may see the market painted in red in the following sessions. The US futures are already in the red this morning. 

Calm before the testimony 

The calm reins in the FX markets, with the dollar index pushing higher this morning, as the markets prepare for some hawkish comments from the Federal Reserve (Fed) Chair Jerome Powell today.  

The EURUSD is back below the 1.05 mark, the dollar-yen extends gains above the 137 mark, with the bulls targeting the 140 level on the back of a clear divergence between the Fed and a still-dovish Bank of Japan (BoJ), and the USDCAD is back above the 1.30 level, after a short tentative to break below. The hawkish Fed pricing and cheaper oil play in favour of a higher USDCAD in the short run.  

Gold is stuck between a rock and a hard place 

Gold is down for the fourth day. The yellow metal is stuck between a rock and a hard place. When the risk sentiment is poor, it is held back by rising US yields, which reduce the safe haven flows to the precious metal. And when the sentiment gets better, it is held back by improved risk appetite, which drives capital to riskier and better yielding assets. And because the US yields rise parallel to inflation expectations, gold sees hardly the benefits of rising inflation expectations.  

Plus, there is news that Switzerland, which is the world’s biggest refining and transit center, imported some $200 million worth of gold from Russia for the first time in May, hinting at a softer industry protest for the war in Ukraine, and a potentially higher supply which could further weigh on the yellow metal’s price. 

Oil and commodities feel the pinch of global recession fears, as well 

iShares Diversified Commodity index broke the 50-DMA significantly for the first time this year. And the energy and commodities’ effectiveness in hedging the rising inflation may be easing, as a global recession would hit demand, and let the energy sector retrace a part of last year’s rally. 

The latter is true for oil prices. The barrel of American crude tanked to $106 per barrel this morning on the back of recession fears. We shall see a strong support near the 100-DMA level, around $106pb, but the real test will be the $100 psychological level, if the fall continues.  

A persistent fall in oil prices will hint that the global recession fears are taking the upper hand, and weigh heavier than the positive factors such as a tight supply, prospects of Chinese reopening and booming travel.  

Joe Biden’s efforts have little impact. The release of strategic reserves and improved relations with Saudi Arabia could hardly ease the price at the pump. The federal gas tax holiday will probably remain ineffective as it won’t help an average SUV driver to save significantly, it won’t last beyond mid-term elections and it may not even have a bipartisan approval as the gas contributes to the Highway Trust Fund, and suspending it would cut the flow to a critical infrastructure. 

So, the best option is a recession-led demand shock to stop the rally to pull the price of a barrel below the $100 level, and ideally toward the $92, the 200-DMA.