Welcome to Key to Markets preview of the Week Ahead
5-day performance as of March 23, 2023. 09:00 GMT.
In case you missed it…
UBS acquires Credit Suisse for CHF 3 billion. The historic deal, which came with government guarantees, helped to draw a line under the banking crisis, enabling contagion fears to subside.
Fed hiked rates by 25 bps. This was smaller than the initially expected 50 bps hike expected just a few weeks ago. The Fed is nearing the end of its hiking cycle, sending the USD to a 6-week low.
Amazon cuts another 9,000 jobs. This is the second round of huge job cuts that come after 18,000 jobs were slashed in January in an efficiency drive as growth slows.
BoE hiked rates. The UK central bank hiked rates by 25 basis points, and a pause is expected to assess the impact of the rate hikes on the economy, even as inflation unexpectedly rose to 10.4%.
Janet Yellen pledges to protect depositors at smaller banks. Her comments helped shore up confidence in the US banking system. First Republic Bank jumped 35% on the news after losing 90% in March.
EUR/USD rises towards 1.10. ECB President Christine Lagarde warned that inflation at current levels warrants higher interest rates for longer. Her comments highlight Fed-ECB divergence.
Oil dropped to a 15-month low. Oil fell to a fresh 15-month low below $65 as fears of a financial crisis and recession hit the demand outlook. The price recovered later in the week.
Bitcoin rose to a 9-month high. Bitcoin rose above 28k putting gains at over 70% this year. The crypto has been helped higher by turmoil in the banking sector and a less hawkish Fed.
Nvidia rises in GTC week. The chip maker has been increased to an 11-month high on AI optimism as CEO Jensen Huang says that Nvidia will bring AI to every industry.
SNB hikes by 50 basis points. Despite the Credit Suisse turmoil, the Swiss central bank tracked the ECB by hiking rates by 50 basis points to 1.5%.
Source: Oxford economics
Something usually breaks at the end of a Fed tightening cycle. As Warren Buffett said, “Only when the tide goes out do you discover who’s been swimming naked”.
The chart above shows where the weaknesses were exposed in recent Federal Reserve tightening cycles.
Over the past 10 days, stresses have appeared in US regional banks due to the steep rate hikes by the Fed and as contagion fears spread. The fallout seems to be contained for now, thanks to rapid action by the Fed and authorities. However, the Fed hiking rates by a further 25 basis points will add more stress to the banking sector.
1. US core PCE index
The Inflation in the US is cooling but at a slow pace. Core PCE, the Fed’s preferred gauge for inflation, rose by 0.6% MoM, more than expected. Forecasts are for core PCE to cool to 0.4% MoM in February and 4.3% YoY, down from 4.7%. Cooling inflation could support the Fed’s less hawkish stance and keep pressure on the USD while boosting stocks and gold.
2. Eurozone inflation
Eurozone inflation has proved to be stickier than initially expected. Headline inflation cooled in February to 8.5% YoY, but core inflation rose to 5.6% YoY, a record high. CPI data for March is expected to cool again to 8.2%. The data comes after ECB President Christine Lagarde warned that inflation is still too high and, at current levels, warrants further rate hikes.
3. German IFO business climate
The German business climate improved in February to 91.1 and is expected to improve again to 91.2, which would mark the sixth straight month of improving morale. The improving mood in the eurozone’s largest economy suggests that recession fears are receding. However, the current assessment component has fallen for the last two months.
4. Micron Technology
Micron Technology, the semiconductor, will release Q3 earnings on Tuesday, March 28th, after the market close. Expectations are for the company to announce a loss of $0.75c per share on revenue of $3.72 billion. The company could take a hefty write-down on inventory and report negative gross margins for the first time in 14 years. Chip demand has declined across many segments. However, this could be starting to bottom out. The stock trades +17% YTD.
5. US consumer confidence
The Conference Board’s consumer confidence index fell in February to 102.9 and is expected to slip again in March to 101.00. The decrease in morale points to consumers being apprehensive about buying big-ticket items. Broadly speaking, weaker confidence often points to weaker spending, which could help inflation cool. More fragile confidence could help fuel bets of a less hawkish Fed.
Economic Calendar Highlights
TA of the major asset classes (Forex – Commodities – Indices…).
EUR/USD (Daily Candlestick Chart)
EUR/USD is in a new uptrend posting higher highs and lows above the 50 SMA.
Price broke out of its sideways range with the former range top neat 1.075 now next support with the range low at 1.053 as 2nd support. The January high is the immediate upside target, with the March ‘22 high at 1.118 after.
GBP/USD (Daily Candlestick Chart)
GBP/USD is in a new uptrend posting higher highs and lows above the 50 SMA.
The break of resistance (turned support) at 1.22 implies a test of the DT resistance at 1.244, where a break higher would confirm a new long-term uptrend and a test of the May 22’ high at 1.265.
USD/JPY (Daily Candlestick Chart)
USD/JPY is in a new downtrend posting lower highs and lows below the 50 SMA.
The two matching lows at 130.5 are near-term support, with the January lows at 127.7 next major support. A break back over 133 is needed for the uptrend to resume.
Gold (Daily Candlestick Chart)
XAU/USD is in an uptrend posting higher highs and lows above the 50 SMA.
The price has temporarily pulled back from the big $2000 round number to 1954, the broken January peak, which is now support. A retest of the broken 50 DMA and swing low at 1885 is possible, but more likely is a continuation move up towards 2070.
Brent Oil (Daily Candlestick Chart)
XBRENT is in a downtrend, forming lower highs and lower lows below the 50 DMA.
Price has made two long lower-wicked candles near the considerable 70 round number as well as the bottom long-term channel line, setting up a possible short-term trend reversal to the upside. Next, resistance can be found at 80, then 83.
US500 (Daily Candlestick Chart)
XUS500 is in an unconfirmed trend, forming a higher low and high while below the 50 SMA.
The price was rejected at the 50 SMA and 4000 level, as well as a downtrend line connecting the highs since February. However, the rejection follows higher highs and lows, which could be the start of a new uptrend.
Thank you very much for reading – and have a great week trading!
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