Calendar Week 04 – 2022

The stock market sell off has been an aggressive start to the year, with major indices down 9%, and worse in the tech market, with the NASDAQ down 15% from all-time highs set in November 2021. Whilst at this stage it is only a correction (a move of 10%) and not yet officially a bear market (that line is 20%), the media is taking it with some surprise – and panic. To those who watch the markets it is no surprise at all.

 

US records highest inflation rate in decades

With the supply chain crimping availability of goods and the virus also shortening the ability to provide services, inflation has been on the rise for many months now and New Zealand has already raised rates twice late 2021. The US Fed, which meets this week, could possibly raise rates too. The FOMC is stuck between a rock and a hard place of supporting the stock market but not letting inflation in the US get out of control – which it already has. With US inflation at decades high of 7%, the market has already priced in 4 hikes, pushing rates to 1% by the end of 2022. This week in Australia we also get our inflation numbers, and it is tipped to be in the 2.4% area, bang in the middle of the RBA’s target. Market chatter is that the RBA will have to raise rates here too, and it is expected to hike at least once this year.

Stock markets do not like an environment of rising interest rates, it makes stocks less attractive to own and more expensive for business to make money – ie less profits, less dividend yield. With stocks already at record valuations over earnings, the run for cover, well, let’s just say it is no surprise here at all.

Looking ahead this week at the news, we have a raft of PMI data on Monday. Australian inflation data Tuesday. Canadian and USA interest rate decision on Thursday. Ending the week with US personal spending and GDP plus GDP across Europe. US earnings season is also upon us with two of the biggest – Apple and Microsoft – reporting this week. In this current environment, don’t expect positive news from them.

 

Volatility is shaking up

So plenty of volatility and news to get our heads around this week. Looking at the majors, the Euro is stuck in a rut, under 1.14 but the lows are creeping higher forming wedge. Which way it will break will be more the USD story than a Euro lead. With US being forced to look at higher rates it will be Greenback domination this week. The US dollar, as the global reserve currency is an odd beast. Historically, it strengthens initially on rate rises but quickly turns bearish. For the Euro, I can see a test of 1.12 in the next week or two.

The Yen is has been predominantly weaker throughout 2021 but recently has gained strength from “safe-haven” flows as the “risk-off” environment is creating panic selling the stock markets. It is already pushing into oversold territory and might bounce on Fed news, but as the stock market goes, so will the USDYEN sell off continue. A break below 112.50 would confirm the bear trend is in place.

The Cable, so much going on in the UK with the virus, a bumbling leader and Brexit still to be fully dealt with. Technically it is still in a downtrend with lower highs and lower lows. Economically, not much to support a stronger Pound, so it too will be dominated by what the Greenback will do. Potential buying area at 1.35.