Weekly Trading Update 06.05.2022

Week of May 9

Markets are struggling to digest central bank actions and weak guidance during Q1 earnings season - the result has been massive volatility - including the first 1000 point daily drop in the Dow this year.

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The week in review

Central bank action last week came in broadly as expected with the Fed raising rates and announcing the roll off of its assets. DXY hit a 20-year high at 104.00.103.00 and 105.00 are major levels. 

The BOE also raised rates, with dissenters looking for a more aggressive move. But cable tumbled to $1.2300 on Bailey's presser, in which he warned of recession. Now, $1.2240 is support and $1.2494 resistance. 

Extensive holidays in Asia and the Middle East kept most of the attention on the West. 

The majority of major global corporations have reported at this point, largely meeting expectations. The reaction to earnings in share prices have typically been around guidance - which was overall quite soft. Better earnings beats in the energy sector outweighed losses in financials; excluding volatile sectors, S&P 500 earnings slipped 2.1% compared to this point of last year. 

The "new stage" in the war in Ukraine did not lead to much change in the situation on the ground.

The week ahead

Geopolitics take center stage

Focus is turning to geopolitics, as Russia holds its annual Victory Day parade on Monday. There is speculation President Putin might use the occasion to call for general mobilization, and a dramatic escalation of the war effort. Other geopolitical risks include the acceleration of Finland and Sweden's joint bid to join NATO. The foreign ministers of the G7 meet on Tuesday, as Europe is set to debate another sanctions package against Russia.

Major economies; major data

On Thursday the UK reports Q1 GDP figures. Other data that could move the markets over the coming days include the German ZEW economic sentiment indicator, US wholesale inventories and Michigan sentiment index. USD/JPY has support at 130 and 129, whereas resistance is laying at 131.24.

Inflation and Trade 

Chinese trade data could set the stage for the markets this week, as the covid situation continues to weigh on optimism and commodities. On Wednesday both Germany and the US report April CPI figures. 

Both are expected to move higher, though since the Fed is the only one reacting, the effect might be more pronounced across the Atlantic. Despite prices rising in the Eurozone at a rate close to the US, the ECB has yet to pull the trigger on rates. EUR/USD is under pressure and $1.0470 could break if prices remain below $1.0620. Below there, $1.0370 is attractive.

Emerging markets back in focus

After the latest central bank meeting cycle with significant hikes, it's now the turn for commodity currencies, which might face some volatility as investors navigate the week's risk events. Malaysia and Mexico both have interest rate decisions- and are expected to tighten, widening the interest rate gap from Europe and Japan.

Other data and events

Earnings season is winding down, but there are still a handful of major names set to report Alibaba, Bayer, Infineon, Intel and Disney. UK Parliament opens on Tuesday as well, with the Queen's Speech and PM Johnson will be looking to move beyond Partygate.