Financial markets’ Weekly Recap 16-20 May

Federal Reserve chairman Jerome Powell doubled down on his agency’s commitment to fighting inflation, but warned Americans of further rough pains ahead. The US central bank declared war against inflation. Monetary policy tightening is still the major trend in the light of statements by the Fed officials and policymakers. Accelerating concerns about probable recession and slowdown of economic growth are persistent bringing about significant risk aversion, and in turn investors and trainers fled to safe haven assets.

Gold, Oil, Other Commodities

Gold futures closed unchanged and steadied on Friday, as investors turned to Treasurys and the US dollar for safety to end a week of prevalent fluctuation on Wall Street, but gold posted the first weekly gain in a month when eventually settled at the $1,842.10 an ounce level.

WTI crude oil prices were mixed, and on early Monday printed the first daily negative in three, down 0.70% around $109.15, even as the Russia-Ukraine crisis escalates. The reason for crude’s latest weakness could be linked to Germany and Italy’s approval of Russia gas payment, getting the permission from Brussels, as well as global oil producers’ rejection of the more output cut than already discussed.

The oil and gas rig count, an early indicator of future output, rose 14 to 728 in the week to May 20, its highest since March 2020, energy services firm Baker Hughes Co said in its closely followed report.

Baker Hughes said that puts the total rig count up 273, or 60%, over this time last year. US oil rigs rose 13 to 576 this week, their highest since March 2020, while gas rigs gained one to 150, their highest since September 2019.

The EU is still unable to agree on Russian oil imports ban, meanwhile, China added some downward pressure to oil prices this week when it clearly signaled its intent to buy more discounted Russian oil. Between China and India, Russia is racing to pivot towards Asia as the EU attempts to ditch its oil.

July silver shed 23 cents, or 1.1%, settling at $21.674 an ounce. The most-active contract rose 3.3% for the week, its biggest weekly percentage gain since April 14, according to Dow Jones Market Data.
As for other metals trade, July copper HGN22, +0.95% fell 0.2% to settle at $4.275 a pound. July platinum PLN22, +1.28% shed 1.3% to close at $941.10 an ounce, while June palladium PAM22, +1.10% slumped 2% to end at $1,939.70 an ounce.

Treasury Bonds
Treasurys have rallied this week, pulling down yields, as a sharp selloff for equities that has left the S&P 500 index at stirred demand for safe-haven assets. The yield on the 10-year note hit a 3 1/2-year intraday high above 3.2% early last week, but has pulled back to around 2.79%. Retreating bond yields can give gold some breathing room. Rising yields raise the opportunity cost of holding nonyielding assets, but skeptics questioned whether the respite would last.

Equities

While investors fled equities in a difficult week for stocks, a sizable $1.4 billion also was pulled from gold funds in the past week, according to Bank of America Global Research.

The US Dollar

US Dollar Index was navigating firmer mood which could be linked to improving covid conditions in China, recently mixed data from the US and expectations that the global leaders will be able to tackle the growth fears with coordinated measures. A reduction in China’s covid numbers and an absence of historic US statistics join optimism by the major policymakers ahead of this week’s Quad Summit in Tokyo to favour a risk-on mood.

On the contrary, escalating fears of the Russia-Ukraine crisis and the divide between the West and Moscow seem to keep the DXY bulls hopeful. The DXY weakness ignores early Monday’s firmer US Treasury yields, up to three bps around 2.81%, by justifying the 1.0% gain of the S&P 500 Futures.

Week of Doubts
Shanghai’s central Jingan district, a key commercial area of the Chinese financial hub, will require all supermarkets and shops to shut and residents to stay home until at least Tuesday.

The use of all exit permits previously given to residents that allowed them to leave their homes will be suspended, the district added without saying why.

The markets will potentially regard this move as a risk which could weigh on risk appetite and the sentiment would be expected to pull on equities, undoing some of the rallies from Friday. Consequently, this would be expected to hamstring high beta currencies such as the AUD in particular.

Key economic indicators in Shanghai dropped significantly in April, underscoring severe impact of the recent outbreak of COVID-19 in China’s major commercial center on economic activities, latest official data showed. Given the lingering challenges in the second quarter of 2022 due to the epidemic, experts called for proactive measures in various areas, including investment, consumption and supply chains, to stabilize growth.


In April, output of major industrial companies in Shanghai fell 61.5 percent year-on-year, compared to a 3.9 percent growth in the first quarter, and the value of industrial exports during the month dropped 57.3 percent, according to data from the Shanghai Bureau of Statistics.

Moving on, preliminary prints of May month’s PMIs and Minutes of the latest Federal Open Market Committee (FOMC) will be crucial for clear directions. Risk catalysts, however, can offer intraday directions.