Risk appetite improved, equities extended rally as talks between Ukraine and Russia hinted at progress, with Russia retreating from Kyiv to concentrate its military efforts in the Donbas region. The de-escalation gave a sigh of relief to investors, although many, including Joe Biden remain skeptical regarding the pullback from Kyiv, that could be ‘limited and tactical’.
But hope is hope, and it is being priced in. The German DAX rallied 2.80% yesterday and closed the session a touch below a major Fibonacci retracement. The French CAC40 rallied more than 3% to above its 200-DMA for the first time since the beginning of the war, as the FTSE100 lagged behind its European peers and gained less than 1% as oil tumbled. Yet the British blue-chip index lost much less than its peers thanks to its solid exposure to oil and commodities, and the outlook for energy and mining companies remain comfortably positive.
Critical 50-DMA holds
US crude dived to the 50-DMA yesterday, but that critical support held strong, and the price of a barrel rebounded back above the $105 level. The short-term outlook remains positive and price pullbacks are still seen as interesting dip buying opportunities if the 50-DMA is not cleared.
This week, OPEC and Russia are not expected to increase production by more than 400’000 barrels.
2-10y inversion
The three major US indices followed up on the European session gains on de-escalation of the situation in Ukraine, but the US 2-year yield caught up, and even briefly surpassed the 10-year yield for the first time since 2019.
No one knows if the latter means an imminent recession in the US, but we know for sure that the behaviour of the yield curve comes as a warning that the artificially supported growth since the subprime crisis will no longer be, and the economy will have to fly with its own wings until at least we see inflation coming back to policy target levels.
Rising US yields, and de-escalation in Ukraine weigh on gold prices. The price of an ounce tipped a toe below the $1900 mark yesterday, but bounced higher. Gold could return to its long-term down-trending channel if geopolitical tensions dissipate, but that may be just a wishful thinking for now, and the upside risks prevail as long as Russian soldiers remain on the Ukrainian territory.
Meme rally?
The curve inversion, nor rising inflation prevent Nasdaq from jumping above its 200-DMA. The S&P500 is up by near 13% since the latest February – March dip, and the meme stocks are on fire, with GameStop up by 158% in the past two weeks and AMC up by more than 160%.
Could the meme craze stretch higher? Yes, it could stretch to the levels the traders want them to! And because these stocks do not trade on fundamentals, the sky, or the moon, is the limit. It all depends on the overall risk appetite – but for now, the pajama traders defy rising inflation, tightening Fed, worsening pandemic and the war.
Data flow
The US will reveal how many private jobs it added in March today. Analysts predict a strong 455K print and a 7% GDP growth in the fourth quarter. Strong economic data will certainly boost the idea that the US economy is strong enough to withstand a tighter Fed policy to fight back inflation, while soft figures will hardly the doves, after JOLTs data confirmed more than 11 million jobs waiting to be picked up.
Soft dollar
US dollar rapidly gave back gains yesterday on de-escalation between Ukraine and Russia. The EURUSD rallied above the 1.11 mark and the dollar-yen returned below 122 after hitting 125 earlier this week.
If the diplomatic picture in Ukraine improved, we could see a deeper downside correction in the US dollar despite the hawkish shift in Fed expectations, as other central banks are turning hawkish on high inflation, as well. Today, the Eurozone flash inflation figures for March start flowing in, with inflation in Spain expected to reach 8%, and inflation in Germany seen at 6.3% from 5.1% printed a month earlier. The CPI figures rise fast, meaning that the European Central Bank (ECB) cannot continue turning a blind eye on the skyrocketing inflation, even with the growing threat of slower growth due to the pandemic and the war.
