Financial Markets’ Weekly Recap, May 1-5

The Fed delivered as expected on Wednesday by raising interest rates by 25 basis points and signaling a pause. However, renewed banking developments stole the headlines from the Fed and triggered a fresh wave of risk aversion, as well as bets of rate cuts during the second half of the year, resulting in a decline in US yields.

This context, along with some technical factors, contributed to a spike in XAU/USD to $2,075; the area of record highs, but it quickly pulled back, unable to firmly consolidate above $2,050.

The US Dollar

EUR/USD begins a new trading week without surprises around 1.1025, following a volatile week that ended near the start. The Euro pair cheered the European Central Bank’s comparatively more hawkish rate hike than the Fed, as well as the fears emanating from the US banking crisis and the debt default woes. However, the region’s economics weren’t so impressive and the US employment report for April marked strong prints, which in turn prod the EUR/USD bulls.

Employment Data

On Friday, the US employment report for April surprised markets by unveiling a jump in the headline Nonfarm Payrolls (NFP) by 253K expected and revised down prior readings of 165K. Further, the Unemployment Rate also eased to 3.4% versus 3.5% market forecasts and previous mark whereas Average Hourly Earnings improved to 4.4% YoY from 4.3% prior (revised) and analysts’ estimations of 4.2%.


Following the upbeat US employment report, St. Louis Federal Reserve President James Bullard, who supported the 25-basis point rate hike that the Fed took last week, called it “a good next step.” The policymaker cited significant amount of inflation in the economy and “very tight” labour market to back his hawkish bias.

On the other hand, ECB’s interest rate hikes are starting to have an effect, but more will be needed to contain inflation,” said Dutch Central Bank President Klaas Knot on Sunday. On Friday, ECB Governing Council member and Bank of France head Francois Villeroy de Galhau said that there will likely be several more hikes.

During the last week, the ECB matched market forecasts by announcing a 25 basis points (bps) increase in its benchmark rates and also unveiled faster dialing back of its Asset Purchase Programme to around EUR25 billion per month from July, from the current pace of EUR15 billion per month. The regional central bank chose to remain hawkish and shut the door for a rate hike pause while saying, “Inflation outlook continues to be too high for too long.

Debt Ceiling Fight Looming

US Treasury Secretary Janet Yellen on Sunday issued a stark warning that a failure by Congress to act on the debt ceiling could trigger a “constitutional crisis” that also would call into question the federal government’s creditworthiness.

Wall Street ended the week on the positive side while the US Treasury bond yields bounced back. Even so, the US Dollar Index remained pressured.

Oil

West Texas Intermediate surged 4.1% while Brent crude increased by 3.9% on Friday. WTI and Brent experienced losses of 7.1% and 5.3%, respectively, as the week came to an end.

Despite Friday’s recovery, oil prices have had a terrible week. Crude futures ended their third consecutive week of losses as a result of declines in preceding sessions. The S&P 500 Energy Select Sector ETF (XLE) also rebounded during Friday’s trading day, yet it ended the week down 5.7%.

Recession-linked concerns drove much of the downward movement in prior sessions. On Wednesday, the Federal Reserve raised interest rates by 25 basis points. The move is expected to further press the brakes on the US economy.

The decline this week coincided with the upheaval in the local banking industry. Oil prices plummeted as regional banks came under strain. Oil will undoubtedly experience collateral damage if a financial crisis catastrophe occurs.

The rise in market forecasts of a recession is commensurate with changes in the price of energy. In the week ending April 28, according to the EIA’s most current Weekly Petroleum Status Report, there was a decline in demand for petrol and jet fuel. Although the reopening of China is anticipated to be good for oil, demand hasn’t been consistent. In April, factory activity in China unexpectedly decreased, which decreased expectations for demand.

Gold

China added to its gold reserves for a sixth straight month, extending a flurry of purchases as central banks around the world expand their holdings of bullion amid escalating geopolitical and economic risks.
China raised its gold holdings by about 8.09 tons in April, according to data from the State Administration of Foreign Exchange on Sunday. Total stockpiles now sit at about 2,076 tons, after the nation increased reserves by about 120 tons in the five months through March.

Gold prices reached the record high area early last Thursday after the FOMC meeting, hitting $2,075 before correcting lower, with the decline accelerating after the release of the US Nonfarm Payroll (NFP) report. While XAU/USD initially broke out of a two-week range to the upside, it quickly pulled back, leaving a gloomy outlook and high volatility in its wake. With central bank meetings and jobs data in the rear-view mirror, eyes turn to US inflation.

What to watch this week:

Moving on, US Consumer Price Index (CPI) for April will be crucial to watch for the EUR/USD traders for clear directions, especially after Friday’s upbeat US NFP. Also, US Senior Loan Officer Opinion Survey on Bank Lending Practices and the debt negotiations will be eyed too. It should be noted that there are no major data/events from Europe this week.