Another week has gone by with another rebound attempt by equity markets trying to ease oversold conditions fizzling out and failing at another lower high. This time around the catalyst was speculation that the Fed could take its benchmark rate up from 1.00% to 2.50% over the summer and then potentially pause heading into midterm elections.
In another sign that the old Fed tailwind “put” has flipped to a Fed headwind “call” as equities perked up, Fed Governor Waller suggested on Monday that the Fed may have to raise interest rates above neutral in order to defeat inflation. The pressure on central banks to catch up and get inflation under control was echoed by the Bank of Canada who after raising its benchmark rate by 0.50%, commented that the “Governing Council is prepared to act more forcefully if needed to meet its commitment to achieve the 2% inflation target”. In other words, the central banks aren’t close to done, they are just getting started. Next Thursday, the European Central Bank weighs in.
In addition to knocking equities back down, hawkish central bank commentary has reignited gains for treasury yields, most notably, pushing the US 30-year yield back up above 3.00% which has reignited the US Dollar. In the last few days, the greenback has started to climb against the Euro, Pound, Yen and Cryptos, while gold and the Canadian Dollar have held their ground. The impact of higher interest rates and tightening credit has turned up in early May auto sales numbers with Honda and Toyota reporting sales declines of 57.3% and 27.3% from a year ago.
Crude oil had picked up but continues to struggle with the $120.00/bbl level. Today’s OPEC+ meeting could spark more action in oil and energy stocks depending on what if anything the group decides to do anything about Russian exports potentially being impacted by sanctions. Meanwhile, China reopening from lockdowns may help to shore up the demand side.
Today and tomorrow bring a flurry of economic announcements, particularly Service PMI reports from around the world and US ADP plus nonfarm payrolls. In addition to the headline numbers, inflation components (prices paid and average hourly earnings/wages) may be closely scrutinized by investors for signs of whether inflation pressures are increasing, levelling off, or easing. With earnings season over, the state of the economy, inflation and monetary policy may remain top of mind with investors through to the mid-month US Fed meeting, decision and projections.
In this issue of Equity Leaders Weekly, we look at Crude Oil and Chinese equities.
Some of the highest visibility, frequent purchases where consumers tend to notice inflation the most is at the gas pump and the grocery store. While agricultural commodity prices have started to backslide a bit recently, energy commodity prices have remained high due to a number of factors related to supply disruptions, sanctions, and fluctuating demand as areas continue to move in and out of lockdown. Back in the winter, around the time that the Ukraine War started, the price of crude oil (CL.F) soared from the $60.00-$80.00 range up toward $125.00. Since then, the price has settled into a higher trading range between $90.00 and $120.00, even with lockdowns in China temporarily curtailing demand. With China reopening, oil has been on an upswing within this range. CL.F is currently encountering resistance in the $120.00 to $125.00 area where it peaked back in 2010 and was briefly exceeded earlier this year. A close above $125.00 would complete a bullish spread double top pattern and signal the start of a new upleg with next potential resistance at the 2008 all-time peak just below $150.00. Initial support appears near $100.00 where a round number and a 3-box reversal converge.
Trading in the iShares MSCI China A ETF (CNYA), which can be seen as representing sentiment toward mainland China stocks, highlights the impact of the latest round of lockdowns. The ETF had been trading in the $40.00 to $45.00 range through the second half of 2021 and the start of this year. CNYA then plunged off a cliff in March and April, staging two bearish low pole declines as China implemented new lockdowns to deal with the latest wave of COVID. CNYA stabilized above $31.50 over the last few weeks. This week, with China starting to reopen, the ETF has started to recover, advancing toward $35.00 and completing a bullish Double Top pattern to signal the start of a new recovery trend. Initial upside resistance may emerge near $38.10, where previous column highs and a horizontal count converge, followed by $39.70, a previous breakdown point just below the $40.00 round number. Initial support has moved up toward $32.85 based on a 3-box reversal.
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