US inflation, dropping energy prices and the hawkish rate hikes are going to lift real yields making Treasuries more attractive than equities. We’re seeing the benchmark index lower, as are the rest of the global bourses. A rising US dollar will weigh on all commodities but generally, a high inflationary market is both good for equities and commodities, so maybe the assessment from the likes of BoC Governor Macklem is right, that we’re nearing peak inflation. Today flows into safe havens apart from gold have been a good trade.
Market Wrap
Gold (orange line) is selling off today as the US dollar surges higher, but for a while now I have been highlighting the US 10-year inflation-index yield (black line) had been traveling higher as real yields turn towards being positive. The US dollar touched 101.850 today while flows also went into the yen and Swiss franc.
The forex heatmap shows the commodity pairs have fared worse today though the euro has also struggled despite the positive outcome in the French election for Macron. The EURUSD is finding it hard to catch a bid as the war in Europe and the uncertainty within French politics continue to keep investors wary of buying the single currency. Over the weekend Russia warned the United States against sending more arms to Ukraine but that is likely to go unheeded. Meanwhile, Germany could be sending some heavily armored vehicles to Ukraine but paradoxically could be sanctioned by Britain for accepting imports of Russian energy. Europe has not been able to come to a consensus with regard to banning all Russian energy imports.
The USDCHF shows how the two currencies are canceling each other out in terms of directional momentum. The Swiss franc though is edging higher, and the RSI is signaling a divergence to price as traders sell the rips. If the EURUSD were to bounce as traders take profits the USDCHF is likely to drop further as they tend to trade inversely to one another
Twitter is up over 5% today after news came out that the board would consider selling the company at the offer price from Elon Musk. Microsoft, Google, and Twitter were among a handful of companies in the green today as the USA500 (S&P500) from the open and after a retest of the opening rice. 4220 is currently holding as support but with only 43% of companies within the benchmark index trading above their daily 200-period moving average, the index is going to find it hard to bounce much higher. As for Twitter, the company will release Q1 earnings this week, and if as expected, the financials miss targets, we could be back down towards the $40 per share, despite Elon’s bid.
The USDCAD is grinding higher despite the Bank of Canada governor stating that the bank will use interest rates to control inflation. And that the market should price a possible 50bps rate hike in June. The bank's assessment is that inflation is too high and that it will persist for longer at these elevated levels. There will need to be a wage hike spiral to keep up with the cost of living which then adds to the inflation and that broadening price pressures are worrying. But also, that inflation is close to a peak. Not sure if that is wishful thinking but other central bankers are saying the same, despite the supply chain disruptions from China and the war in Ukraine.
The biggest driver of inflation has been the cost of energy and currently, the Brent contract is down 5% today. If we were to get back to the long-term average of around $80 the inflation story may be about to peak. US Energy Secretary Granholm said today that US oil and gas production is increasing and will continue to increase. China under lockdown is going to drop the global demand, so assuming the US and possibly some of OPEC+ are producing more we could be at the point of supply keeping up with demand. In terms of price action, I will be more bearish on oil when we close below a significant swing low.
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