Although the volatility was a bit muted, it was another choppy week in financial markets, as traders juggled debt ceiling issues, earnings results, and shifting central bank biases.
Equities and commodities were off to a bullish start, thanks to positive market sentiment extending from late last week, while bond yields were on edge ahead of the US CPI release.
Before long, risk-off flows resurfaced when US debt ceiling talks were postponed and the Bank of England joined the “bulimic rally” bandwagon, prompting market players to revisit recession fears.
Downbeat inflation and trade data from China, along with another US regional bank’s report of a drop in deposits, contributed to the risky asset sell-off and a return to US dollar strength.
Notable economic news and updates:
🟢 Extensive arguments about market risk
Chinese stocks extended their gains, supported by gains in the banking sector and residential gas suppliers
BoJ meeting minutes reveal that some policymakers see “positive signs” that inflation is falling back within the target range, indicating a possible end to the easing cycle soon.
US CPI and PPI reports reflected slowing inflationary pressures, reinforcing expectations of a Federal Reserve pause during the year and possible interest rate cuts by 2024.
US Initial Jobless Claims posted another weak reading, keeping market players wary of a job slowdown in the coming months
Extensive arguments for deflecting market risk
A survey of the Fed’s chief loan officer showed a modest deterioration in lending standards and tighter credit conditions, but no major evidence of a credit crunch.
Warren Buffett warned of slowing growth in the United States and deteriorating relations between the United States and China, as he revealed at an annual meeting of shareholders that Berkshire Hathaway sold $13.3 billion worth of shares in the first quarter.
API and EIA posted surprise gains in crude oil inventories, reviving market demand concerns and risks from a possible “moderate recession”.
China reported a slowdown in export growth of 8.5% year-on-year in April, down from a previous gain of 14.8%, and a decline in imports of 7.9% versus an expected drop of 0.2%.
The Bank of England raised rates by 0.25% as expected while raising inflation estimates, but the comments suggested a higher pillar for future tightening moves while monthly GDP highlighted stagflation risks.
The US debt-ceiling impasse continues, despite Biden signaling he made some progress in meeting with congressional leaders and postponing talks on Friday to allow more time for staff-level discussions.
Earnings data turned out to be mixed: PayPal reported stronger-than-expected first-quarter revenue and earnings, Airbnb shares fell 12% on weak revenue guidance for the second quarter, and Disney’s earnings were in line with estimates.
PacWest Bancorp reports deposit losses in early May of approximately 9.5% and that it is exploring all strategic options
US Preliminary Consumer Confidence for May: 57.7 (64.0 expected) vs. 63.5 prior – University of Michigan
The European Board of Auditors (ECA) said on Friday that European Central Bank supervisors are too lax with banks on how they manage credit risk.
UK March GDP: -0.3% m/m (+0.1% m/m expected) vs. 0.0% m/m prior
Weekly global market summary
Dollar, Gold, Standard & Poor’s 500, Oil, US 10-Year Yield Overlay Planned by TV
Market players started the week hungry for risk, as the upbeat sentiment from last Friday’s stronger-than-expected US Nonfarm Payrolls report seemed to have carried over the weekend.
Recession fears seemed to have taken a back seat at the time, allowing crude oil and stocks to make gains, led by another rally in Chinese stock indices.
However, markets resumed their holding pattern ahead of the highly anticipated US CPI report on Wednesday, allowing safe havens such as gold to take advantage of the uncertainty. The precious metal managed to keep its head above $2,000/oz leading to the inflation report, which was seen as make or break chances of a Fed rate hike.
Treasury yields also managed to extend gains on Tuesday, albeit at a slower pace, as traders were likely to reduce their holdings of short-term bonds as US debt ceiling talks between the US president and congressional leaders got under way. Unfortunately, negotiations continued to stalemate, with Treasury Secretary Yellen warning that there were no “good options” other than congressional approval to raise the current $31.4 trillion limit.
As widely expected, Wednesday’s US CPI release reflects a slowing in inflationary pressures, with the headline reading declining from 5.0% to 4.9% y/y, boosting the prospect of a halt in interest rate hikes, and is likely to lead to a sharp decline in bond yields. America after an event.
Meanwhile, Crude Oil remained range bound and unable to capitalize on risk due to demand concerns stemming from sudden stock gains.
Slowing Chinese inflation and business activity, as well as a bearish turn in stock indices, led to risk-off flows around midweek. Copper and silver pulled sharply due to weak Chinese demand outlook while gold Give in to some profit-taking and the emerging strength of the US dollar.
The safe-haven dollar was quick to capitalize on this change in sentiment on Thursday, despite more signs of stalemate in debt-ceiling talks, lower producer prices, downbeat initial jobless claims data, and a resurgence in banking sector woes.
And we saw more of the same on Friday without a major catalyst/news event to turn the US dollar into a run. Almost all other major assets fell against the US dollar during the London and US sessions on Friday, including government bonds, indicating global recession fears and US debt ceiling dramas, both of which remained top of mind for traders into the weekend.