Sive Morten
Special Consultant to the FPA
- Messages
- 18,644
Fundamentals
The amount of economic information that we have to consider is growing like a snowball. And I'm really don't know how I put everything in 1-2 weekly reports that we prepare with FPA. If I put everything here - you either fall asleep or keep reading it through the whole next week (LOL). May be we should start FPA Telegram channel...In fact, the US energy situation demands separate consideration, because at final point it makes impact on households' wealth and has direct impact on our forecast and currency rate. CPI that we've got this week, is just a top of the iceberg, guys. Recent data, speeches confirm our initial view - Fed expectations of 2% inflation are naive and rate change doesn't help him to normalize situation. We warned about it 2 months ago. From time to time I'm watching Tucker Carlson on Fox news and think that you should try either. He tells correct things and explains same subjects simpler than we do, because we try also to show you numbers and provide economical background.
Market overview
President Joe Biden cautioned that U.S. inflation could last "for a while" after data on Friday showed that politically sensitive price pressures unexpectedly accelerated in recent weeks. The wary comments at an event hosted by billionaire media magnate Haim Saban came as the administration faces increasing pressure ahead of Nov. 8 midterm elections, where Biden's fellow Democrats' control of Congress is on the line.
J. Biden has invented the special term - "Putin tax". This is great idea that supposedly should explain everything to the people and make them relax and enjoy life. But somehow it doesn't happen and maybe be people could be ingenuous but definitely not an idiots. Not Putin has printed 4.5 Trln EUR in the EU and $5-6 Trln. in the US last year. And not Putin has exposed import sanctions on all goods that America needs. If Putin does set the prices in the US - why J.Biden is still needed on the President's post? It is time to make T-shirts and place the stickers "Putin is our president" on cars and trucks. But, jokes aside, guys.
The dollar climbed to a near four-week high against a basket of currencies on Friday, after data showed U.S. consumer prices accelerated in May, strengthening expectations the Federal Reserve may have to continue with interest rate hikes through September to combat inflation. In the 12 months through May, the CPI increased 8.6% after rising 8.3% in April. Economists had hoped that the annual CPI rate peaked in April.
The inflation report was published ahead of an anticipated second 50 basis points rate hike from the Fed next Wednesday. The U.S. central bank is expected to raise its policy interest rate by an additional half a percentage point in July. It has hiked the overnight rate by 75 basis points since March.
The European Central Bank's 'whatever it takes' commitment to bind the euro zone is wearing thin as it tries to 'normalise' monetary policy and give inflation hawks more say in how it goes about it. Warning that inflation is unacceptably high and that it would remain above the 2% target over a three-year forecast horizon, the ECB on Thursday flagged a first interest rate rise in more than 10 years next month, after the end of new purchases on its long-running bond-buying programme from July 1st.
Although ECB chief Christine Lagarde stressed that the central bank was 'committed' to avoiding so-called 'fragmentation' of borrowing costs between euro zone members as bond buying ends, financial markets were far from sure. Many investors doubt Lagarde's developing approach to ECB policymaking - which appears to give greater voice to national central banks and countries with a more hawkish monetary stance that those at the centre - will allow the same sort of open-ended commitment to rein in debt costs at the periphery as given by her predecessor Mario Draghi.
As worrying, the risk premium on Italian 10-year bonds over Germany's moved to 225 bps - its highest since the onset of a pandemic that forced multiple fiscal rescues and pushed Italy's debt to a record 160% of gross domestic product. The same destiny supposedly should come up with the Greece.
With inflation at a record-high 8.1% and still rising, the ECB now fears that price growth is broadening out and could trigger a wage-price spiral, heralding a new era of stubbornly higher prices. While ECB chief Christine Lagarde had already flagged a series of rate hikes in recent comments, the tone of the ECB's comments on Thursday took markets by surprise. And that triggered a further ratcheting up of rate-hike bets in financial markets, which were already aggressively priced.
Deutsche Bank now expects the ECB to deliver two, hefty 50 basis point rate hikes this year after kicking of a tightening cycle with a quarter-point move in July.
Morgan Stanley said that following Thursday's ECB meeting, it had revised up the size of the tightening expected at the September meeting to 50 bps, while adding an additional 25 bps hike in October to its new rate call.
Money market futures now suggest that almost 150 bps worth of ECB tightening is priced in by year-end, up from 140 bps just after Thursday's ECB statement and around 135 bps on Wednesday.
Investors continued to pull out money from European equity funds while adding exposure to U.S. stocks as global markets recovered from the lows hit at the end of May, BofA said on Friday in a research note citing EPFR data for the week to Wednesday. Overall, the asset class saw $12 billion worth of inflows. But it was the 17th week in a row of outflows for Europe with $2.1 billion leaving the space. By contrast, U.S. equity funds saw a fifth week of inflows worth $13.2 billion. BofA analysts also said their 'Bull & Bear' indicator, which seeks to track market trends, had moved deeply into "extreme bearish" territory.
The EU situation outlook. What is about gas?
According to Spydell Finance look, the ECB turns off QE in July, but earlier ECB has bought over 4.2 trillion euros (i.e. just printed it) on the balance sheet from February 2020 to June 2022, which two times exceeds the accumulated budget deficit of all Eurozone countries. While ECB was printing money - they could spend them on bonds back-buying, keeping rates low and providing stability of the debt market
Since July, the printing press should be turned off. At the same time, record inflationary pressure in Europe makes disaster effect on the debt market. It is impossible to count on steady cash flow into the debt market when negative real rates are expanding. Capital is running out of debt markets not only in the US but in EU either. At the same time, the strongest combined energy and food crisis, and coming migration crisis should lead to the wake of hunger riots and political destabilization in Africa towards the end of 2022-the beginning of 2023.
Current account in EU drops to the zero level, which means that they can't provide more capital to the US, and now they also have to think how they will finance the budget deficit:
Finally, we're coming to most "thin" place in the EU structure - energy demand. As you know EU stops buying crude oil from Russia and contracted gas purchases for 30-40%. But what country replaces Russian supply? The answer is - the US. All free LNG volumes are set to the Europe. The US LNG gas industry works at full capacity now, but these power can't be increased right now, because of vital under-financing in previous years due ESG (Green Energy) policy.
Freeport LNG to shut down for at least three weeks after incident at Texas Gulf coast facility. Freeport produces 20% of all LNG in the US. This is tactical pitfall, and it is not a disaster as now is a summertime. Still, the US is releasing oil from strategic reserves as never before. Interestingly that the pace of reserves reduction of oil are comparable to the increment of net exports, which are now sent to Europe.
The situation is similar with gas. the United States supplies gas to Europe at the highest rate in history, as absolutely as relatively in the structure of total LNG exports. At the same time, gas reserves in the USA at a minimum for 5 years, and the vulnerability of the power system is the maximum for several decades. By closing energy shortages in Europe, the United States is "exposing" its own energy system.
The entire net increment of gas exports in 2022 relative to 2021 is formed from reserves! Gas exports from the United States increased by 10 billion cubic meters in 6 months compared to the same period a year ago – that's 10-12 billion cubic meters of gas reserves decreased. This is, in fact, one of the reasons for the increase in gas prices in the US domestic market (more than three times a year).
And what's next? Super expensive gas in Europe, the prices of which were 6-8 times higher than domestic American ones. This led to the fact that gas producers sent for export everything they could send to the physical limits of the infrastructure of LNG terminals and available gas carriers. They managed to triple LNG exports in three years – plus 70 billion cubic meters per year for export compared to 2019 and plus 35 billion cubic meters per year by 2021.
Now the price gap is naturally leveling off.
However, in all this, it is important that the United States generates gas exports through the closure of the energy deficit in Europe after the imposition of sanctions on Russia - this is the first. Secondly, exports to Europe come from oil and gas reserves, because they cannot increase domestic production of either oil or gas. Thus, the declared state of emergency of the US power system is a consequence of accumulated imbalances.
US shale gas production is stalled. It was possible to increase production by only 3-4% over the year, compared to the 4th quarter of 2019, progress by 4-5%. In the first 3 months of 2022, the United States produces the same amount of shale gas as in the first quarter of 2020.
The reasons are typical – the specifics of shale projects and underinvestment due to collapse of the market in 2020, when many participants in oil and gas production were washed away. After those events, management conducted an extremely conservative investment policy, fearing a repeat of 2020. The second reason is the toxic ESG agenda.
The export of American LNG to Europe increased more than 10 times in total over three months (from 2 to 21 billion cubic meters by April 2022).
It was 7.2 bln c.m. in January 2022, 6.1 in February, and 7.5 in March - an absolute record. Thus totally it is almost 21 billion cubic meters for the quarter according to Spydell Finance calculations and reports of the US Department of Energy. For April and May, the data has not yet been disclosed.
Global exports of American LNG by April 2022 reached the highest in history – 29.3 billion cubic meters in 3 months, the share of European exports was 71.6% - there has never been such a thing. The average European share of LNG exports from the United States in 2018 is 13%, in 2019 and 2020 – 36%, in 2021 - 33%.
Now the US is redirecting almost all Asian LNG supplies to Europe. The infrastructure is running at the limit.
You probably start laughing guys, but the same story with the US Crude Oil. Commercial reserves decreased by 9.5 million barrels in three weeks, strategic reserves by 16.4 million in three weeks. It means that the US releases 1.2 million barrels off the reserves daily!
However, net exports from the United States have been balancing around 1.2-1.3 million barrels/d for the last month also.
If we reduce domestic production, consumption, exports, imports and changes in reserves, it turns out that the United States is firing strategic reserves of oil into foreign trade - into exports! If the United States would reduce exports of oil and petroleum products by 1.5 million, they would not have had to reduce strategic oil reserves at a record pace in history.
Judging by the export tracking, all the excess volume is sent to Europe. It turns out that the strategic reserves of the United States are reducing record, closing the consumption deficit in Europe!
Conclusion
So, guys, we could imagine what should happen in the EU economy by example of the US, as EU and ECB is lagging behind the Fed for ~ 6 months. Situation in EU should become even worse by two reasons. First is, EU is not self-sufficient with energy. It doesn't have enough gas and oil to supply own heavy industry and population. The US does. As we've shown above EU energy shortfall is covered by the US supply. But the US energy sphere works at full capacity and can't increase the LNG and oil production. And this is during the summer. Autumn-winter period could bring bad surprises.
Second - EU economy is structurized. It is big different between Germany and Greece, for example. But Brussels have to close gaps around. Finally, EU stands in epicenter of geopolitical tensions and cares the major burden of sanctions. This tells that the US still stands in better situation, although the nature of problems is the same.
As we've said and shown previously - the interest change can't improve the situation. EU will meet the same problems. No relief happens with ECB decision, because they have to hike rate to 8% to get the effect. It means that we should see starting depression on stock market, as gap between DAX/Eurostoxx dividend yield and interest rates starts to narrow. Rising yields negatively impact on weak companies and junk bonds. Exceptional expenses burden could lead to massive bankruptcies, unemployment rising, dropping of population wealth.
Because of ultimate liquidity injections and low interest rates, banks have very low percent margin (difference between deposit rate and loans rate). With rising interest rates, the loan defaults start to increase which makes negative impact on banking sector.
Obviously consumption should start dropping. With this environment it is difficult to count on EUR appreciation. Minimal break of hydrocarbons supply from the US will put EU economy in chaos. This is razor thin way now. Finally, illegal migration - the new wave could start closer to the end of the year because of food problems.
NEXT WEEK
We mostly watch for multiple central banks meeting - Fed, BoE, BoJ etc. It's a central-bank heavy week ahead, with the U.S. Federal Reserve expected to deliver its second straight half-point rate hike to bring inflation under control. Britain and Sweden, too, will likely lift interest rates again, while Switzerland may be getting ready to join the rate-hike club. In contrast, the Bank of Japan should confirm it's ultra-dovish stance remains solid.
#1 Fed
It's time to go big or go home in the battle to curb inflation. So Wednesday will likely see the Federal Reserve hike interest rates by another 50 basis points (bps), adding to the 75 bps of tightening already delivered since March. Also watch the Fed's projections for rate moves in the so-called "dot plot." Unexpectedly aggressive rate-hike projections could pile pressure on U.S. Treasuries, with 10-year yields back above 3%.
#2 US Retail Sales
The jobs market is holding up well and retail sales data on Wednesday could show how consumers are doing as borrowing costs rise. Analysts expect a 0.2% monthly increase in retail sales for May.
#3 BoE
But on June 16, the Bank of England will likely raise rates for the fifth time since December. GDP and jobs figures are also due on Monday and Tuesday. As a reminder, Q1 joblessness touched 48-year lows at 3.7%. But adjusted for inflation, pay was down 2% on year-earlier levels, the biggest fall since 2013.
Meanwhile, Prime Minister Boris Johnson, his authority shaken by a vote of confidence, is forging on with "fiscal firepower" pledges and plans to amend a Northern Ireland trade protocol. The former could exacerbate inflation; the latter will almost certainly stoke tensions with the European Union.
Technicals
Monthly
As market is a bit shocked with the fact that inflation is not going down, this has triggered collapse not only on FX, but on stock market as well. It nature of the action doesn't exclude that it might be long-term downside continuation, according to our monthly picture.
Market is not at oversold. Our major AB-CD pattern here shows clear acceleration of CD leg through the OP target, market already stands below YPS1 which is strongly bearish. This significantly increases chances on downside continuation. Although we have nearest target around 0.9750, which is the butterfly 1st extension, it is more probable that in the case of drop below the parity, EUR should tend to major target cluster of 0.90, including 1.618 butterfly target and two different XOP's, with all-time one.
Weekly
On Friday we've mentioned 1.0514 last daily Fib support, where, at least theoretically, upside reversal is possible. Because initially we consider two ways of upward retracement, and AB=CD shape was one of them. Still, despite MACD trend is still bullish here, the nature of the action, together with the driving factors keep us aside from taking new long position here. With this "black" nasty week and tail close - it is few stimulus for long entry.
Daily
Our task on next week is simple, if it could be simple at all during Fed meeting. We need to identify the nature of current action, as it might be direct downside continuation. To understand it we have to watch for price action around final 1.05-1.0515 support area, accompanied with the oversold, by the way. If EUR intends to show upside AB-CD action here - it should show real reversal and move above 1.0780 top.
Still, second way seems more probable now. If EUR shows just minor bounce - this becomes the signal for downside continuation and breakout of recent lows. We consider it as primary scenario and will watch for the bounce for taking the short position. Because it seems, that pullback is over with high degree of certainty.
Intraday
In general the reaching of XOP here is not a surprise, but it has happened a bit faster than we thought. Here we intend to watch market reaction on daily support area:
On 1H chart we do not see any reaction yet. Here are two levels to watch for. 1.06 K-area seems suitable for short entry, while 1.0670 is a kind of indicator. If our suggestion on EUR weakness is correct - market should not move above it. Otherwise, with moving back above 1.0670-1.07 area EUR could show CD upside leg on daily chart, although now it seems as hardly possible scenario.
The amount of economic information that we have to consider is growing like a snowball. And I'm really don't know how I put everything in 1-2 weekly reports that we prepare with FPA. If I put everything here - you either fall asleep or keep reading it through the whole next week (LOL). May be we should start FPA Telegram channel...In fact, the US energy situation demands separate consideration, because at final point it makes impact on households' wealth and has direct impact on our forecast and currency rate. CPI that we've got this week, is just a top of the iceberg, guys. Recent data, speeches confirm our initial view - Fed expectations of 2% inflation are naive and rate change doesn't help him to normalize situation. We warned about it 2 months ago. From time to time I'm watching Tucker Carlson on Fox news and think that you should try either. He tells correct things and explains same subjects simpler than we do, because we try also to show you numbers and provide economical background.
Market overview
President Joe Biden cautioned that U.S. inflation could last "for a while" after data on Friday showed that politically sensitive price pressures unexpectedly accelerated in recent weeks. The wary comments at an event hosted by billionaire media magnate Haim Saban came as the administration faces increasing pressure ahead of Nov. 8 midterm elections, where Biden's fellow Democrats' control of Congress is on the line.
J. Biden has invented the special term - "Putin tax". This is great idea that supposedly should explain everything to the people and make them relax and enjoy life. But somehow it doesn't happen and maybe be people could be ingenuous but definitely not an idiots. Not Putin has printed 4.5 Trln EUR in the EU and $5-6 Trln. in the US last year. And not Putin has exposed import sanctions on all goods that America needs. If Putin does set the prices in the US - why J.Biden is still needed on the President's post? It is time to make T-shirts and place the stickers "Putin is our president" on cars and trucks. But, jokes aside, guys.
The dollar climbed to a near four-week high against a basket of currencies on Friday, after data showed U.S. consumer prices accelerated in May, strengthening expectations the Federal Reserve may have to continue with interest rate hikes through September to combat inflation. In the 12 months through May, the CPI increased 8.6% after rising 8.3% in April. Economists had hoped that the annual CPI rate peaked in April.
The inflation report was published ahead of an anticipated second 50 basis points rate hike from the Fed next Wednesday. The U.S. central bank is expected to raise its policy interest rate by an additional half a percentage point in July. It has hiked the overnight rate by 75 basis points since March.
The European Central Bank's 'whatever it takes' commitment to bind the euro zone is wearing thin as it tries to 'normalise' monetary policy and give inflation hawks more say in how it goes about it. Warning that inflation is unacceptably high and that it would remain above the 2% target over a three-year forecast horizon, the ECB on Thursday flagged a first interest rate rise in more than 10 years next month, after the end of new purchases on its long-running bond-buying programme from July 1st.
Although ECB chief Christine Lagarde stressed that the central bank was 'committed' to avoiding so-called 'fragmentation' of borrowing costs between euro zone members as bond buying ends, financial markets were far from sure. Many investors doubt Lagarde's developing approach to ECB policymaking - which appears to give greater voice to national central banks and countries with a more hawkish monetary stance that those at the centre - will allow the same sort of open-ended commitment to rein in debt costs at the periphery as given by her predecessor Mario Draghi.
As worrying, the risk premium on Italian 10-year bonds over Germany's moved to 225 bps - its highest since the onset of a pandemic that forced multiple fiscal rescues and pushed Italy's debt to a record 160% of gross domestic product. The same destiny supposedly should come up with the Greece.
With inflation at a record-high 8.1% and still rising, the ECB now fears that price growth is broadening out and could trigger a wage-price spiral, heralding a new era of stubbornly higher prices. While ECB chief Christine Lagarde had already flagged a series of rate hikes in recent comments, the tone of the ECB's comments on Thursday took markets by surprise. And that triggered a further ratcheting up of rate-hike bets in financial markets, which were already aggressively priced.
Deutsche Bank now expects the ECB to deliver two, hefty 50 basis point rate hikes this year after kicking of a tightening cycle with a quarter-point move in July.
Morgan Stanley said that following Thursday's ECB meeting, it had revised up the size of the tightening expected at the September meeting to 50 bps, while adding an additional 25 bps hike in October to its new rate call.
Money market futures now suggest that almost 150 bps worth of ECB tightening is priced in by year-end, up from 140 bps just after Thursday's ECB statement and around 135 bps on Wednesday.
Investors continued to pull out money from European equity funds while adding exposure to U.S. stocks as global markets recovered from the lows hit at the end of May, BofA said on Friday in a research note citing EPFR data for the week to Wednesday. Overall, the asset class saw $12 billion worth of inflows. But it was the 17th week in a row of outflows for Europe with $2.1 billion leaving the space. By contrast, U.S. equity funds saw a fifth week of inflows worth $13.2 billion. BofA analysts also said their 'Bull & Bear' indicator, which seeks to track market trends, had moved deeply into "extreme bearish" territory.
The EU situation outlook. What is about gas?
According to Spydell Finance look, the ECB turns off QE in July, but earlier ECB has bought over 4.2 trillion euros (i.e. just printed it) on the balance sheet from February 2020 to June 2022, which two times exceeds the accumulated budget deficit of all Eurozone countries. While ECB was printing money - they could spend them on bonds back-buying, keeping rates low and providing stability of the debt market
Since July, the printing press should be turned off. At the same time, record inflationary pressure in Europe makes disaster effect on the debt market. It is impossible to count on steady cash flow into the debt market when negative real rates are expanding. Capital is running out of debt markets not only in the US but in EU either. At the same time, the strongest combined energy and food crisis, and coming migration crisis should lead to the wake of hunger riots and political destabilization in Africa towards the end of 2022-the beginning of 2023.
Current account in EU drops to the zero level, which means that they can't provide more capital to the US, and now they also have to think how they will finance the budget deficit:
Finally, we're coming to most "thin" place in the EU structure - energy demand. As you know EU stops buying crude oil from Russia and contracted gas purchases for 30-40%. But what country replaces Russian supply? The answer is - the US. All free LNG volumes are set to the Europe. The US LNG gas industry works at full capacity now, but these power can't be increased right now, because of vital under-financing in previous years due ESG (Green Energy) policy.
Freeport LNG to shut down for at least three weeks after incident at Texas Gulf coast facility. Freeport produces 20% of all LNG in the US. This is tactical pitfall, and it is not a disaster as now is a summertime. Still, the US is releasing oil from strategic reserves as never before. Interestingly that the pace of reserves reduction of oil are comparable to the increment of net exports, which are now sent to Europe.
The situation is similar with gas. the United States supplies gas to Europe at the highest rate in history, as absolutely as relatively in the structure of total LNG exports. At the same time, gas reserves in the USA at a minimum for 5 years, and the vulnerability of the power system is the maximum for several decades. By closing energy shortages in Europe, the United States is "exposing" its own energy system.
The entire net increment of gas exports in 2022 relative to 2021 is formed from reserves! Gas exports from the United States increased by 10 billion cubic meters in 6 months compared to the same period a year ago – that's 10-12 billion cubic meters of gas reserves decreased. This is, in fact, one of the reasons for the increase in gas prices in the US domestic market (more than three times a year).
And what's next? Super expensive gas in Europe, the prices of which were 6-8 times higher than domestic American ones. This led to the fact that gas producers sent for export everything they could send to the physical limits of the infrastructure of LNG terminals and available gas carriers. They managed to triple LNG exports in three years – plus 70 billion cubic meters per year for export compared to 2019 and plus 35 billion cubic meters per year by 2021.
Now the price gap is naturally leveling off.
However, in all this, it is important that the United States generates gas exports through the closure of the energy deficit in Europe after the imposition of sanctions on Russia - this is the first. Secondly, exports to Europe come from oil and gas reserves, because they cannot increase domestic production of either oil or gas. Thus, the declared state of emergency of the US power system is a consequence of accumulated imbalances.
US shale gas production is stalled. It was possible to increase production by only 3-4% over the year, compared to the 4th quarter of 2019, progress by 4-5%. In the first 3 months of 2022, the United States produces the same amount of shale gas as in the first quarter of 2020.
The reasons are typical – the specifics of shale projects and underinvestment due to collapse of the market in 2020, when many participants in oil and gas production were washed away. After those events, management conducted an extremely conservative investment policy, fearing a repeat of 2020. The second reason is the toxic ESG agenda.
The export of American LNG to Europe increased more than 10 times in total over three months (from 2 to 21 billion cubic meters by April 2022).
It was 7.2 bln c.m. in January 2022, 6.1 in February, and 7.5 in March - an absolute record. Thus totally it is almost 21 billion cubic meters for the quarter according to Spydell Finance calculations and reports of the US Department of Energy. For April and May, the data has not yet been disclosed.
Global exports of American LNG by April 2022 reached the highest in history – 29.3 billion cubic meters in 3 months, the share of European exports was 71.6% - there has never been such a thing. The average European share of LNG exports from the United States in 2018 is 13%, in 2019 and 2020 – 36%, in 2021 - 33%.
Now the US is redirecting almost all Asian LNG supplies to Europe. The infrastructure is running at the limit.
You probably start laughing guys, but the same story with the US Crude Oil. Commercial reserves decreased by 9.5 million barrels in three weeks, strategic reserves by 16.4 million in three weeks. It means that the US releases 1.2 million barrels off the reserves daily!
However, net exports from the United States have been balancing around 1.2-1.3 million barrels/d for the last month also.
If we reduce domestic production, consumption, exports, imports and changes in reserves, it turns out that the United States is firing strategic reserves of oil into foreign trade - into exports! If the United States would reduce exports of oil and petroleum products by 1.5 million, they would not have had to reduce strategic oil reserves at a record pace in history.
Judging by the export tracking, all the excess volume is sent to Europe. It turns out that the strategic reserves of the United States are reducing record, closing the consumption deficit in Europe!
Conclusion
So, guys, we could imagine what should happen in the EU economy by example of the US, as EU and ECB is lagging behind the Fed for ~ 6 months. Situation in EU should become even worse by two reasons. First is, EU is not self-sufficient with energy. It doesn't have enough gas and oil to supply own heavy industry and population. The US does. As we've shown above EU energy shortfall is covered by the US supply. But the US energy sphere works at full capacity and can't increase the LNG and oil production. And this is during the summer. Autumn-winter period could bring bad surprises.
Second - EU economy is structurized. It is big different between Germany and Greece, for example. But Brussels have to close gaps around. Finally, EU stands in epicenter of geopolitical tensions and cares the major burden of sanctions. This tells that the US still stands in better situation, although the nature of problems is the same.
As we've said and shown previously - the interest change can't improve the situation. EU will meet the same problems. No relief happens with ECB decision, because they have to hike rate to 8% to get the effect. It means that we should see starting depression on stock market, as gap between DAX/Eurostoxx dividend yield and interest rates starts to narrow. Rising yields negatively impact on weak companies and junk bonds. Exceptional expenses burden could lead to massive bankruptcies, unemployment rising, dropping of population wealth.
Because of ultimate liquidity injections and low interest rates, banks have very low percent margin (difference between deposit rate and loans rate). With rising interest rates, the loan defaults start to increase which makes negative impact on banking sector.
Obviously consumption should start dropping. With this environment it is difficult to count on EUR appreciation. Minimal break of hydrocarbons supply from the US will put EU economy in chaos. This is razor thin way now. Finally, illegal migration - the new wave could start closer to the end of the year because of food problems.
NEXT WEEK
We mostly watch for multiple central banks meeting - Fed, BoE, BoJ etc. It's a central-bank heavy week ahead, with the U.S. Federal Reserve expected to deliver its second straight half-point rate hike to bring inflation under control. Britain and Sweden, too, will likely lift interest rates again, while Switzerland may be getting ready to join the rate-hike club. In contrast, the Bank of Japan should confirm it's ultra-dovish stance remains solid.
#1 Fed
It's time to go big or go home in the battle to curb inflation. So Wednesday will likely see the Federal Reserve hike interest rates by another 50 basis points (bps), adding to the 75 bps of tightening already delivered since March. Also watch the Fed's projections for rate moves in the so-called "dot plot." Unexpectedly aggressive rate-hike projections could pile pressure on U.S. Treasuries, with 10-year yields back above 3%.
#2 US Retail Sales
The jobs market is holding up well and retail sales data on Wednesday could show how consumers are doing as borrowing costs rise. Analysts expect a 0.2% monthly increase in retail sales for May.
#3 BoE
But on June 16, the Bank of England will likely raise rates for the fifth time since December. GDP and jobs figures are also due on Monday and Tuesday. As a reminder, Q1 joblessness touched 48-year lows at 3.7%. But adjusted for inflation, pay was down 2% on year-earlier levels, the biggest fall since 2013.
Meanwhile, Prime Minister Boris Johnson, his authority shaken by a vote of confidence, is forging on with "fiscal firepower" pledges and plans to amend a Northern Ireland trade protocol. The former could exacerbate inflation; the latter will almost certainly stoke tensions with the European Union.
Technicals
Monthly
As market is a bit shocked with the fact that inflation is not going down, this has triggered collapse not only on FX, but on stock market as well. It nature of the action doesn't exclude that it might be long-term downside continuation, according to our monthly picture.
Market is not at oversold. Our major AB-CD pattern here shows clear acceleration of CD leg through the OP target, market already stands below YPS1 which is strongly bearish. This significantly increases chances on downside continuation. Although we have nearest target around 0.9750, which is the butterfly 1st extension, it is more probable that in the case of drop below the parity, EUR should tend to major target cluster of 0.90, including 1.618 butterfly target and two different XOP's, with all-time one.
Weekly
On Friday we've mentioned 1.0514 last daily Fib support, where, at least theoretically, upside reversal is possible. Because initially we consider two ways of upward retracement, and AB=CD shape was one of them. Still, despite MACD trend is still bullish here, the nature of the action, together with the driving factors keep us aside from taking new long position here. With this "black" nasty week and tail close - it is few stimulus for long entry.
Daily
Our task on next week is simple, if it could be simple at all during Fed meeting. We need to identify the nature of current action, as it might be direct downside continuation. To understand it we have to watch for price action around final 1.05-1.0515 support area, accompanied with the oversold, by the way. If EUR intends to show upside AB-CD action here - it should show real reversal and move above 1.0780 top.
Still, second way seems more probable now. If EUR shows just minor bounce - this becomes the signal for downside continuation and breakout of recent lows. We consider it as primary scenario and will watch for the bounce for taking the short position. Because it seems, that pullback is over with high degree of certainty.
Intraday
In general the reaching of XOP here is not a surprise, but it has happened a bit faster than we thought. Here we intend to watch market reaction on daily support area:
On 1H chart we do not see any reaction yet. Here are two levels to watch for. 1.06 K-area seems suitable for short entry, while 1.0670 is a kind of indicator. If our suggestion on EUR weakness is correct - market should not move above it. Otherwise, with moving back above 1.0670-1.07 area EUR could show CD upside leg on daily chart, although now it seems as hardly possible scenario.
