Stocks, Oil and Forex Analysis – Markets Question the Fed’s Ability to Orchestrate a Soft-Landing

Global Macro and Stock Markets Analysis

The selloff in US stocks extended on Monday as investors worried that the Federal Reserve would not be able to rein in inflation and orchestrate a soft-landing for the economy.

There is a risk-off tone to start the week, focusing on China’s continued struggle to contain Covid and no end in sight to the Russia-Ukraine war. With the US economy seemingly late-cycle with the market already pricing a sizeable Fed hiking cycle, the focus remains on recession risk.

We are even caught in a “good is bad” scenario. Ostensibly, with US data holding up, recession modelling suggests the Federal Reserve is on track for the soft landing it so desires; however, the risk is the data remains strong, inflation expectations elevated — and policy tightened until something snaps, and unfortunately for investors, it looks like stocks are the first to break.

That is the path the markets fear and one that investors keep upfront and personal.

Oil Fundamental Analysis

Oil crumpled under the weight of a broader market selloff as the European Union softened some of its proposed sanctions on Russian crude to appease potential holdouts.

The worm turned for oil bulls positioned for EU sanctions only to get sideswiped by headlines suggesting Shanghai is tightening mobility restrictions and no EU embargo agreement.

However, the swift repricing of global recession risks on the back of central banks hiking rates into a perfect storm is triggering investors’ sell-all reaction mode.

Hence oil prices are getting caught up in the “risk-off “carnage as recessionary thunderheads envelop the global economy, with the Fed the clearly the most prominent cloud seeder.

Tangible assets like oil present a hedge to rampant inflation. But compared to higher prices from ‘real’ demand sources, such as Chinese fixed asset investment, in addition to supply concerns, ‘superficial’ hedging demand has been a critical contributor to the continued rise in oil prices; the implications are when the Fed finally ratchets up interest rates high enough to stem the growth of inflationary pressures; oil prices fall as basically the FED is trying to slow down the US economy.

The European Union continues to face internal objections from some members. On the other side, the G7 agreement and support from key EU members indicate continued progress toward an eventual deal. The holdouts within the EU are individually heavily reliant on Russian oil and gas. Still, they are small from a volumetric perspective in more total EU imports so we could see some speculative support between Brent $ 104-105.

FOREX Fundamental Analysis – US Dollar vs Japanese Yen

Hard To See USDJPY Breaking Higher Before Wednesday

Japan returned from the Golden Week holidays to continue local buying of USDJPY.

On the break of SPX500 4000 and decidedly lower oil prices, there has been a reduction of USDJPY longs that were nudged along after Atlanta Fed President Raphael Bostic said he does not believe the FOMC needs to hike by increments of more than 50bp – that is the main comment that has spooked the USDJPY markets.

We defer to Technicals without crucial data infection points as traders turn to focus on Wednesday’s US CPI. The Asia session opens near 130.45-55/70, and the 131.00/50 zone remains a key pivot on the topside, with the April 28 high of 131.25 and Monday’s high of 131.35. Ahead of the US April CPI on Wednesday, it is tough to see the pair breaking through this level decisively. The pair did make a marginal new high, so a reversal of this level would, for now, put in a double-top.

For a look at all of today’s economic events, check out our economic calendar.