By Lukman Otunuga, Senior Research Analyst at FXTM
Asian shares and US equity futures flashed red Tuesday morning despite the overnight rally on Wall Street. Investors seem to be on edge, adopting a defensive approach towards risk amid fears over the global economic outlook and concerns around inflation.
These negative themes overshadowed Monday’s optimism offered by President Joe Biden’s comments on removing some tariffs on Chinese imports. The overnight warning from Snap that it was unlikely to meet revenue and profit forecasts added to the risk-off mood, pulling US futures lower.
European markets, as expected, opened softer with the negative sentiment sending investors towards safe haven assets.
In the currency space, the euro held near one-month highs on expectations of the ECB raising interest rates in July. The safe-haven dollar attempted to stabilise, while gold traded around $1855.
Market sentiment remains fragile with inflation jitters, growth concerns, Covid lockdowns in China, ongoing geopolitical risks, and Fed policy fears creating a poisonous cocktail.
Last week, the S&P 500 briefly fell into bear market territory. Should caution remain the name of the game over the next few days, the benchmark index could find itself back in that psychological “red zone”.
On the data front, investors will direct their attention towards the flash PMI data for the Eurozone, U.K., and the US. These reports may provide the first major clues as to the health of the economy in May amid ongoing geopolitical risks, inflation fears and growth concerns.
May’s PMI data may offer valuable insight into how the Ukraine-Russia developments and China’s lockdown have impacted supply chains and fanned inflationary pressures.
Euro bulls back in town?
Buying sentiment towards the euro received a major boost on Monday after ECB President Lagarde heightened expectations around the bank raising interest rates in July and September. German business sentiment also unexpectedly improved in May.
Nevertheless, the ECB is still lagging behind the Federal Reserve which is expected to raise rates by 50 bps at its next two meetings in July and September. Given how the European Union recently cut its forecasts for economic growth amid ongoing geopolitical risks and disruptions to energy supplies, this could limit the euro’s upside.
Looking at the technical picture, EURUSD seems to be experiencing a technical bounce on the daily charts with prices trading above 1.0640. The key question is whether the current move is a rally to higher levels or just a “dead cat bounce”. A break above 1.0750 may open the door towards 1.0850. Should 1.0640 prove to be unreliable support, the EURUSD could sink back towards 1.0500.
Oil under pressure
Oil prices were under pressure on Tuesday, dropping over 1% as growth worries and China’s Covid-19 curbs fueled concerns about the demand outlook.
The sell-off came even as China attempted to cushion the impact of lockdowns by rolling out stimulus measures to support businesses and stimulate demand. The commodity is likely to remain volatile due to the various forces influencing its supply and demand dynamics.
On the geopolitical front, the EU’s proposal to ban Russian oil has reached a stalemate due to Hungary’s opposition and is unlikely to be approved when the bloc’s leaders meet next week.
WTI continues to linger around the sticky $110 level. Sustained weakness below this point could encourage a decline towards $105 and $100
Gold volatility
The next few days could be volatile for gold. Several key themes continue to pull and tug at gold prices, dictating the short to long-term outlook. These include recession fears, inflation jitters, Russia-Ukraine developments, China’s Covid-19 crises, and Fed hike expectations.
While gold seems to be pushing higher, the Fed’s aggressive approach towards higher-interest rates could act as a major roadblock for the zero-yielding metal. Alternatively, developments revolving around Ukraine-Russia and global growth fears may cushion the metal’s downside losses.
Technically, a break above $1855 could trigger a move towards $1885 and $1900. Sustained weakness under $1855 is seen opening the doors towards $1820 and $1800.
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