Stocks & USD edge higher ahead of the Fed – Daily Market Brief, May 4, 2022

Stocks in Europe are pointing to a broadly higher open on Wednesday, and US stocks are holding yesterday’s gains as attention shifts to the Federal Reserve interest rate decision.

  • COVID continues to spread in China, hurting demand for Asian stocks
  • DAX holds steady -German exports drop -3.3% as Ukraine war takes its toll
  • USD rises as Fed is set to hike rates by 0.5% & start QT, the focus will be on the outlook

European stocks gained yesterday boosted by encouraging macro data and upbeat earnings. UK manufacturing PMI was upwardly revised to 55.8 in April, up from a preliminary reading of 55.5, and eurozone unemployment fell to 6.8%, a record low. Meanwhile, BP reported a surge in profits amid growing calls for a windfall tax as household energy prices surge and investors mulled over the prospect of HSBC spinning off its Asia business.

The FTSE closed +0.2% and the DAX booked gains of 0.7%.

China

Today bourses are heading for a stronger start despite weakness in Asia overnight as the COVID picture continues to deteriorate; Beijing has shut metro stations and is curbing public transport as it presses ahead with its zero-COVID policy, regardless of the economic cost. There is no end to lockdown in sight in Shanghai, and Beijing looks to be heading towards a similar fate.

While global manufacturing data is holding up so far, the outlook is darkening amid expectations of further supply chain disruptions.

Eurozone data

German trade data revealed a plunge in exports in March as the first hard evidence of the impact of the Ukraine war on the German economy. Exports tumbled by -3.3% MoM and exports to Russia literally came to a standstill. With COVID lockdowns in China and a continuation of last year’s supply chain issues, in addition to falling exports, the outlook for the German economy is darkening. The DAX is trading flat.

Eurozone retail sales are expected to show sales slowing in March -0.1% MoM after 0.3% growth in February. Weaker sales are forecast as energy prices jumped in March, inflation hit a record high, and the cost of the living crisis meant households reined in their spending.

EURUSD trades above 1.05 for now, but its direction is likely to be dictated by the Fed later.

The Fed

The key focus for the markets today is the Federal Reserve rate announcement due later. A 50 basis point rate hike by the Fed is 100% priced in, which opens the door to a buy the rumor sell the fact response.

Attention will be on the Fed’s plans to trim its $9 trillion balance sheet and how aggressively the US central bank plans to raise interest rates from here. The Fed has hinted that they want to front-load monetary tightening, but the question is just how far are they willing to go with the most significant shift in monetary policy in decades? The US labor market remains incredibly tight with a record 11.5 million unfilled vacancies, which gives Fed Powell & Co. room to act aggressively without fearing a recession.

A base-case scenario would be a 50 basis point rate hike, $95 billion quantitative tightening, and a reiteration that what comes next is data-dependent. This is, broadly speaking, priced in.

A more hawkish Fed could boost the USD index back towards 104.00, pulling EUR/USD to fresh 2022 lows.

Under this scenario, Gold, which has already lost 1.6% in May, could head lower towards $1830, and the NASDAQ could extend the 13% selloff experienced in May.

Disclaimer: This article is not investment advice or an investment recommendation and should not be considered as such. The information above is not an invitation to trade and it does not guarantee or predict future performance. The investor is solely responsible for the risk of their decisions. The analysis and commentary presented do not include any consideration of your personal investment objectives, financial circumstances, or needs.

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