It could be
worse. This could be the highlight of the week as the S&P 500 index fell
slightly by 0.2% to 4118 points, while it was 2.0% down at 4053 points in the
middle of the week. Commodities were also down with Brent crude prices losing
4.5% to $78.60, and copper prices sliding by 2.5% to $8530 per ton.
Recession
fears have exacerbated this week as GDP in the United States slowed down to
1.1% in the Q1 2023 compared to 2.6% in the previous quarter. Inflation numbers
went sky-high as Personal Consumer Expenditure (PCE) Prices went up by 4.2% in
the Q1 2023, missing expectations by just a 0.5% increase. It was also higher
than 3.7% in the previous quarter.
First
Republic Bank (FRC) contributed to these fears as it reporter a deposits
outflow of $70 billion during the last banking turmoil. That is too much even
for a large American bank. The losses were even larger considering the $30
billion it received from other banks led by JPMorgan in a rescue plan aimed at ramping
up confidence. There is no one left to support the bank except the U.S.
Government, which is also struggling to increase the debt ceiling. U.S.
officials are coordinating talks over a new FRC rescue plan with efforts from
other U.S. private financial institutions, including JPMorgan. FRC had to
replace cheap deposit funding with more expensive Federal Reserve (Fed)
provisions. Nonetheless, FRC troubles are unlikely to lead to a panic as both
the Fed and the Ministry of Finance are deeply involved in mitigating the
issue.
The help
came from the Big Tech sector that delivered strong first quarter financials
and literally saved the market from collapse.
But
inflation spikes together with economic slowdown are clearly indicating a
stagflation trend that is much more dangerous than the recession itself. This
time the Fed is unlikely to achieve a soft landing for the American economy as this
recession is seen to be much severe than a standard one. If the Fed acts
flimsily the repercussions of this stagflation would be manifested throughout
the entire economic cycle over the next 7-10 years. Thus, the Fed has to be
extremely hawkish during its next monetary policy meeting next week, marking a
clear path to bring down inflation without further supporting the American
stock market. Otherwise, the U.S. and the global economy may be engulfed by a
structural crisis.
Technically,
the S&P 500 index has an upside formation with targets at 4500-4600 points.
This scenario will become the primary one if the index moves above 4180-4200
points. However, fundamentally it is unlikely to happen.
The
recession scenario chances are rising in the oil market as Brent crude prices
continue to tumble below $80.70 per barrel. Recession targets for this scenario
are at $40-60 per barrel of the Brent crude benchmark. Prices are testing the
support at $77.00-79.00 per barrel. Once they break through, prices may
accelerate towards $67.00-69.00 per barrel.
Gold prices
are moving inside the mid-term upside formation with targets at $2000-2100 per
troy ounce that have already been met. However, the tension is mounting as
prices may continue to go down to $1900 per ounce if they pass the $1980
threshold. If the support survives, prices may lift to $2080-2100 per ounce.
So, it is better to wait until the battle over $1980 ends and prices move above
$2000 per ounce. The battle is still in process.
The U.S.
Dollar is expected to be supported by the continuous upside signals. Short
trades for EURUSD opened at 1.06700-1.07200 with a downside target at 5000
points below the opening level and the same 5000 points for a stop-loss order
are intact. The decline of the EURUSD to 1.05000-1.05500 was used to close half
of the trade. The other half should be continued until the targets of
1.03000-1.03500 are met.
Short
positions for AUDUSD from 0.66900-0.67400 with the target of 3500 points and
the same stop-loss order could be closed to balance loses originated from short
positions for GBPUSD from 1.23300-1.23800 with a target of 5000 points and the
same 5000 points for a stop-loss. The overall profit from these two trades
should not be wasted.