A chaotic trading session yesterday saw a couple of major price levels broken. Crude oil fell below the $100pb support, the EUR/USD sank below 1.03, Cable slipped below the 1.20, gold tanked to $1763 an ounce, and the US 2-year yield exceeded the 10-year yield. The common denominator for most of the price action was the mounting recession fears and investor panic.
Crude: the $100 pivot
The barrel of US crude took a decent dive yesterday, and broke the $100 psychological support as the recession fears weighed on demand prospects, and shifted the market attention from too little supply, to potentially too little demand.
Oil is slightly up this morning, near the $100 resistance, but the market rhetoric shifts from buying the dips to selling the tops. The next downside target is set at $93, the 200-DMA, then to $85, my year-end target.
Cherry on top. There is news that officials in Shanghai are mass testing again, following a surge in cases in the past two days.
ECB is the Eurozone’s biggest headache
European stocks are on the chopping block as European companies deal with the Ukrainian war, a worsening energy crisis, the rising inflation, and a central bank that’s unable to give the right treatment to the member states, as it is stuck between rising inflation and the risk of triggering a renewed debt crisis in the Eurozone.
European futures point at a positive start this morning, but gains remain fragile.
The EUR/USD trades below 1.0250 at the time of writing. The euro bulls are deserting the market on the idea that the European Central Bank (ECB) will not get to the right speed for raising its rates, without sending the peripheral yields through the roof and triggering a renewed debt crisis.
The ECB will likely have the biggest test of its recent history. Yes, the ECB went through a debt crisis in the past and managed to keep the eurozone together. But this time, the bank faces a higher level of complication: the rapidly rising inflation, and the emergency to bring it down doesn’t buy time for the ECB.
On the contrary, the longer the ECB waits, the lower the euro will be, And the softer euro will, in return, worsen inflation. It’s a toxic spiral.
As per the EUR/USD, all eyes are now set to parity. And indeed, if the ECB doesn’t change its mind for a 50bp rather than a 25bp at this month’s meeting, the pair could fall below parity. A scenario of catastrophe for the European economy.
On the other hand, the euro-swissy extends losses below parity on the back of diverging central bank views. The Swiss National Bank (SNB) became more hawkish to fight inflation, and the ECB’s hawkishness is either not enough, or not credible. Therefore, the franc should continue to appreciate against the single currency, but the SNB will certainly step in and buy some euros to prevent the franc from getting too strong against the euro.
BoJo loses two important figures
Boris Johnson lost two important figures for his cabinet yesterday, including Rishi Sunak who said "they can’t carry on like this", referring to the illegal parties, the sexual abuse allegations, etc.
The political turmoil in the UK certainly added to the selling pressure on the sterling, however, the reason why Cable slipped below the 1.20 mark was a booming US dollar, across the board.
The dollar index rallied to a fresh 20-year high and flirted with the 107 mark.