Markets Dive On Growth Fears

Asian equities remained under pressure on Tuesday as the massive sell-off across financial markets left investors bloodied and worried. Although European futures are pointing to a positive open despite the overall market caution, the lack of appetite for risk may cap upside gains. Mounting fears around rising interest rates and slower global economic growth hammered global sentiment yesterday, with risk assets feeling the burn.

In the currency space, king dollar reached levels not seen in 20 years, thanks to risk aversion and rising Treasury yields which climbed past 3.20% for the first time since 2018. Commodity markets also tumbled as investors looked for the sell button across all asset classes. Although gold prices seem to be stabilising this morning, the precious metal is likely to face headwinds in the form of an appreciating dollar, rising Treasury yields and Fed rate hike bets. Oil prices are not looking too pretty as lockdowns in China and global growth fears weigh on the demand outlook.

The negative vibe and uncertainty across financial markets may encourage investors to maintain a safe distance from riskier assets this week, resulting in a higher dollar and some support for gold.  On the data front, Germany’s ZEW economic confidence survey results will be published later this morning. Markets expect the sentiment index to slip to -42.0 in May versus the -41.0 in April. Later in the day, it’s all about speeches from numerous Fed officials which could spark some dollar volatility. However, the main course and key risk event of the week will be the US CPI report on Wednesday.

Dollar advance unstoppable?

Dollar bulls charged into the trading week with renewed vigour, reaching levels not seen in 20 years on Monday, as U.S Treasury yields climbed to new cycle highs. The greenback has appreciated against every single G10 currency this quarter, powered by Fed hike expectations and risk aversion stemming from ongoing geopolitical risks.

With the Dollar Index (DXY) punching above 104.00, this may open doors to higher levels. However, a technical pullback could be the next course of action before bulls step into a higher gear. Given how the week ahead is jampacked with economic US data and speeches from Federal Reserve officials, dollar volatility should remain a key theme.

Later today, a bunch of Fed speakers will be under the spotlight. If they strike a hawkish tone and revive expectations around a 75-basis point rate hike in June, the dollar could extend gains across the board. Tomorrow sees the release of the latest US inflation report which is expected to show prices rising 8.1% year-on-year in April compared with 8.5% in March. A figure that exceeds market expectations could propel the dollar higher, allowing the DXY to secure a strong close above the 104.00 level.

Oil prices tumble amid China lockdowns    

Oil prices have stumbled into the week, closing down 6% on Monday, due a combination of factors weighing on the demand outlook.

The commodity found itself under pressure as Saudi Arabia cut prices for customers in Asia and part of Europe, while weaker export data from China compounded downside losses. Growing concerns over higher interest rates, recession worries and Covid-19 restrictions in China leading to slower export growth are also weighing on prices. However, ongoing geopolitical risks revolving around the Ukraine-Russia conflict could cushion downside losses.

Looking at the technicals, it’s all about the $100 level on both crude benchmarks. Should this point prove to be unreliable support, we could see a sharp selloff. Initial support in Brent is the 100-day simple moving average at $97.24.

Commodity spotlight - Gold

The past few weeks have not been kind for gold. An appreciating dollar, rising Treasury yields and expectations over the Fed maintaining an aggressive approach towards monetary policy have battered the precious metal. With the greenback recently hitting levels not seen in 20 years, the path ahead for gold remains rough and rocky.

On the technical front, prices are bearish on the daily charts with support found at $1855. It will be interesting to see whether bulls can defend this level or bears drag prices even lower. The widely watched 200-day simple moving average sits at $1835. Whatever the outcome, volatility is certainly on the cards. 

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