US and European futures are trading flat on the first trading day of the week, which will see earnings season kicking off in the US and essential US inflation reading. Investors are also focused on the ongoing elections taking place in France, where Emmanuel Macron will face Marine Le Pen in the final round of the election on April 24. So far, the polls are indicating that Macron is likely to win the election, and if he does, it would mean more certainty for the French election, which could support the CAC40 index, which is down nearly 10% so far this year.
The Dow Jones Industrial Average was down 0.3 per cent for the week, while the interest-rate-sensitive Nasdaq Composite was down 3.9 per cent, and the S&P 500 was down 1.3 per cent. The 10-year Treasury yield increased by more than 30 basis points for the third week in a row.
Geopolitics and Spill Over
The geopolitical uncertainty is still on traders’ dashboard, and they will be watching the meeting between the Austrian Chancellor Karl Nehammer, who will meet President Putin in Moscow today. The hope is once again to see some more peaceful talk.
On the economic side, World Bank predicts that Ukraine’s economy will contract by 45%, whereas Russia’s economy will shrink by 11%. In our opinion, Russia is fully committed to boosting its economy, and the evidence of that can be seen by looking at the Ruble’s performance. Russia will strengthen its government reserve fund by 273.4 billion Rubles ($3.4 billion).
A vital trading week is here. Traders are likely to be on the edge because we have the US banks kick-starting the first quarter’s earnings. JP Morgan and BlackRock will report their numbers on Wednesday, and followed by that; we will hear earnings results from Citigroup, Wells Fargo, Morgan Stanley, and Goldman Sachs on Thursday. Traders would be focused on two aspects of bank earnings; they would like to know what these Wall Street giants think of the Fed’s current monetary policy stance. A higher interest rate environment must add more value to their profit margins. These two crucial factors are likely to govern their price action this week.
The other significant event that traders will be looking at very closely is the US CPI number. The number will be coming on Tuesday, and the forecast is for 1.2%, while the previous reading was at 0.8%. Inflation is already running way too hot. If the actual number comes even hotter than the forecast, we will likely see much higher volatility in the equity, forex, and fixed-income markets. Traders are highly likely to be spooked by a strong inflation number to confirm that the Fed is more likely to increase the interest rate by 50 basis points rather than 25 basis points. While inflationary pressures will remain, we believe March will be the top inflation rate in terms of the rate of change.
Economic numbers on retail sales and consumer sentiment will be released on Thursday. On Friday, a market holiday, Empire State Manufacturing and Industrial Production numbers will be out.
On Thursday, the ECB will most likely remain silent but express its desire to continue on the path of monetary policy normalization. Christine Lagarde, the ECB President, may hint that liftoff may occur in the second half without providing specifics. Also, this week, the RBNZ and Canada may raise interest rates, while Turkey remains unchanged.
Bitcoin had another quiet weekend, and the price action doesn’t look that sexy today. The BTC price is gradually moving lower, and over the short term, it is stuck in a consolidation zone of 40K to 48K. Traders like to see the price breaking above the 50K price level as that will only bring more interest to the bitcoin price. The last week’s big event in Miami has made it clear that fundamentals are only improving, and more and more countries are ready to adopt the crypto king as a legal tender. The big one which traders are watching very closely is Mexico.
The precious metal is likely to remain volatile. At the same time, investors continue to adjust their portfolios according to the Fed’s hawkish monetary policy while keeping a close eye on the economic fallout of the Ukraine crisis. In terms of price action, it is evident that traders would like to have more clarity on geopolitical uncertainty between the US and Russia and the rising inflation situation in the US. Supply-side disruptions, worsened by the Russia–Ukraine war, will likely keep inflation higher for longer.
Brent’s prompt spread is narrowing, signalling waning bullish sentiment. After recently trading at more than $3 a barrel, the spread has dropped to levels last seen in January. Due to China’s substantial inventory releases and demand limitations, backwardation has partly collapsed.