This
article is devoted to a special tech analysis pattern in Forex
and the stock market that can be found on a good half of reversals of trend and
correctional movements from M1 to MN. However, right because of this frequent
emergence, the main task of a trader is to distinguish between a Failure Swing
that will bring them a profit with more than 50% probability and a mock Failure
Swing.

Description
and examples of Failure Swing

A
bearish Failure Swing is a double top, the second peak being lower than the
first one. A bullish Failure Swing is a double bottom, the second bottom being
higher than the first one.

Here
are some simple examples:

The
idea of the pattern is that the shorter second part of the pattern demonstrates
such a low market interest to the preceding movement that market players do not
even want to test the tip of the first peak or bottom.

Nonetheless,
classically speaking, an uptrend is considered in action when its highs and
lows increase consecutively; similarly, a downtrend is considered acting when
the lows decrease one after another. However, when a bullish Failure Swing
appears with an increasing instead of decreasing high, this means that the
downtrend is at least slowing down.
And when the price break through point 2
from below, the trend is considered ascending. With a bearish Failure Swing,
the situation is the same: when the bottom point is broken through from above –
the trend is already considered descending. Of course, all this is just
hypothetical, in Forex as well as in the futures or stock markets. Any trading
signal is hypothetical. The trader’s task is to make the probability come true.

Requirements
to a highly probable Failure Swing

For
a Failure Swing to be able not only to slow down the movement in which it has
appeared but also to really push the price in the opposite direction, the
pattern needs time. Particularly – no less than 30% of the time that the
preceding uptrend or downtrend took to develop.
However, the time can work
either on generating force for a reverse movement or banal consolidation for
going in the previous direction. So, a highly potential pattern must demonstrate
changing dynamics of price
movements.

As
for a bearish Failure Swing, the price must drop as fast as possible from high
1 to low 2, while the incline from low 2 to high 3 must be as slow as possible.
And from high 3, the price must start falling again very fast and confidently,
closing the candlestick on the working TF under low 2. As soon as this happens,
a bearish Failure Swing is considered complete.

For
a bullish Failure Swing to have high potential, the price also needs to grow
from point 1 to point 2 as fast as possible, while the decline from point 2 to
point 3 must be very smooth. From point 2 to point 3, the price must grow
steeply, confidently closing the candlestick above point 2. After this, the
bullish Failure Swing is considered complete because the price movement hereafter
complies with a classic uptrend.

In
most cases, the angles of lines 1-2 and 2-3 will be equal often the trend
reverses at line 2-3. However, line 2-3 must never have a sharper angle than
line 1-2. And from point 3, the price must always go confidently in the target
direction and always at a sharper angle than line 2-3 has.

Signal
to buy

The
signal appears as soon as you notice a highly potential pattern complete. Enter
a buying position as soon as the candlestick closes above the level of point 2.
However, if the candlestick closes high above point 2, place a Buy Limit order
a bit higher than the broken top because in highly potential Failure Swings,
the price seldom drops lower. Example of a signal to buy:

Signal
to sell

It
appears as soon as the candlestick closes under the level of point 2 of the
signal pattern. If the candlestick closes deep under the level of point 2, you
can place a Sell Limit order a couple ticks under it or at the level of point
2. Example of a signal to sell:

Stop Loss and
Take Profit

Trading
by the Failure Swing, the initial Stop Loss should be placed behind point 1. If
you are selling, mind the spread. The SL can be moved after newly emerging
extremes while the price is approaching the Take Profit. While the trader
should not wait long, moving the SL to the breakeven, using each new extreme,
when they will trail the position they should always keep in mind that the
market will need time to consolidate powers for a new movement.

As
for the TP, the trader can do without it, using their position trailing skills.
However, trading in Forex or the futures market, I would recommend using a Take
Profit. I checked the EUR/USD chart over 14 months for
Failure Swings that could be used and decided that on H1 I would not have
placed any TP at all if it had to be to times larger than the SL. As for
trading Failure Swings on the same pair, M5, over 11 months, I decided that an
optimum TP should be no more than 3 sizes of the SL. Alternatively, choose the
TP size based on your experience.

However,
in the stock market, trailing positions can be more efficient than a stiff TP.

Money
management

Trading
Failure Swings, the trader can choose between risking fixed percentage of the
deposit or risking the same lot. I presume that any trading signal has the same
chances for success and failure, that is why I recommend risking fixed
percentage of the deposit. It should be no more than 2%, and when you are still
learning – no more than 1%.

Example
of trading:

I
made an in-depth study before writing this article and concluded that trading
Failure Swings can bring a profit. However, for this probability to become
real, the trader should choose a comfortable TF and be very picky, choosing
candidates for profitable signals. Thus they will minimize risks.

By Analytical Department at RoboForex.

The awesome CN Wire notes that..China’s cabinet: Will further promote release of consumption potential and sustainable recovery of consumption. Will guide financial system to supprot real economy through various measures such as lowering interest rates and reducing fees.Will steadily increase mass consumption such as automobiles. All regions shall not add new automobile purchase restriction measures.Regions that have implemented automobile purchase restrictions will gradually increase number of automobile increment quotas and relax qualification restrictions for car buyers.Will make overall use of existing financial funds to support construction of consumption-related infrastructure. Will include eligible projects in scope of local govt special bonds, so that investment can be better used to boost consumption.~ with China seemingly regressing back to lockdown mode (did it ever progress out of it??), you have to believe that govt support measures will only become more pronounced.

There are plenty of updates on Russia’s war on Ukraine, just noting this one. Ukrainian President Zelensky announced the US visitors. He will meet with the two on Sunday. Further weapons provisions will be on the agenda. Zelenskyy: said he expected „not just presents or some kind of cakes, we are expecting specific things and specific weapons.” —Unrelated – join us on ForexLive on Monday morning Asia time for opening rates. EUR will be in the spotlight with the French presidential election. Polls have Macron to win reasonably comfortably. But … polls have been unreliable and two-horse races have an in-built degree of unpredictability.Background election posts:Euro sees lopsided risks ahead of French election runoffPresidential election in France this weekend is a risk event for the EUR

MON: German Ifo
(Apr), US National Activity Index (Mar).

TUE: NBH Policy
Announcement; Japanese Unemployment (Mar), UK PSNB (Mar), US New Home
Sales (Mar).

WED: Chinese Industrial
Profits (Mar), Australian CPI (Q1), German GfK (May), New Zealand Trade
Balance (Mar).

THU: BoJ &
Riksbank Policy Announcements, CBRT Inflation Report; Japanese Retail
Sales (Mar), EZ Consumer Confidence Final (Apr), German Prelim. CPI (Apr),
US GDP Advance (Q1), PCE Prices Advance (Q1).

FRI: CBR Policy
Announcement, Chinese Caixin Manufacturing PMI Final (Apr), German Import
Prices (Mar), German GDP Flash (Q1), Swiss KOF (Apr), EZ Flash CPI (Apr),
Flash Prelim. GDP (Q1) & M3 (Mar), US PCE Price Index (Mar),
University of Michigan Final (Apr), Canadian GDP (Feb).

  NOTE: Previews are
listed in day-order

FRENCH PRESIDENTIAL ELECTION (SUN):
The first round of voting saw no overall winner with incumbent President Macron
falling short of the 50% threshold required for victory. As such, the race will
now go to a “winner takes all” second round involving Macron and far-right
candidate Le Pen. Ahead of the first round, polls had Macron at 53% for the
second round and Le Pen at 47% despite the spread between the two being as wide
as 58% – 42% throughout March. In the aftermath of the first round vote and
ahead of the TV debate on April 20th, Macron managed to extend his lead to 55%
from 53%. Whilst there hasn’t been a great deal of polling fully encapsulating
the post-debate period, many commentators are of the view that it will not be a
gamechanger in terms of the race. The base case for the market remains one of
continuity with Macron widely expected to be awarded a second term. Macron’s
policy platform will need to be viewed in the context of the June parliamentary
elections which will determine the ease with which he can legislate his policy
agenda. That said, a Macron victory will likely provide support for French
stocks and bonds and some upside in EUR as risks of a disruptive Le Pen
Presidency are priced out; however, the sustainability of any EUR move would be
questionable given that the currency is likely to be more sensitive to the
fallout from the Ukraine crisis and the path of monetary policy at the ECB. A
Le Pen victory would be viewed as less of a market positive, and may result in
downside for the EUR, underperformance in French bonds and stocks. Economic
policies would likely centre around addressing the cost-of-living crisis with
UBS of the view that such policies could be more fiscally expansive than those
presented by Macron. Contagion into Eurozone-wide assets would likely be more
contained than it would have been in 2017 with Le Pen having scaled back her
ambitions for France to leave the EU. However, questions would be raised over
what tensions would arise from Le Pen’s more conciliatory tone towards Russia
in the run up to the election. Furthermore, some commentators have suggested
that Le Pen would look to play a similar role to that of Hungarian PM Orban who
has proved to be a disruptive force within the Union. In the FX space, a Le Pen
victory could prompt calls for parity between EUR and USD.

CHINESE INDUSTRIAL PROFITS (WED)/PMI
(FRI): There are currently no forecasts for the industrial
profits metric, but the release comes against the backdrop of the COVID-related
shut-downs in the region; thus expectations will likely be skewed towards a Y/Y
decline and will likely be overlooked. Greater focus may fall on the anecdotal
commentary within the PMI releases on Friday, particularly on inflation and
growth. Nonetheless from a policy perspective, Chinese authorities are
seemingly more concerned about growth. Note, that Chinese markets will be
closed from May 1-5th due to Chinese Labor Day.

AUSTRALIAN CPI (WED):
Australian consumer prices are expected to have broadly picked up in Q1.
Headline CPI is expected at 1.7% Q/Q (prev. 1.3%) and 4.6% Y/Y (prev. 3.5%),
with the Trimmed Mean gauge seen rising to 1.2% Q/Q (prev. 1.0%) and 3.4% Y/Y
(prev. 2.6%), while the Weighted Mean is expected to rise to at 1.1% Q/Q (prev.
0.9%) and 3.3% Y/Y (prev. 2.7%). Aussie bank Westpac sees inflationary
pressures building due to continued supply disruptions, rising commodity and
energy prices, and robust domestic demand. From a policy perspective, the RBA’s
April meeting minutes stated saw the central bank note the pick up in recent
inflation, and it expects further increases ahead, with the measure of
underlying inflation in the March quarter expected to rise above 3%. The
minutes also suggested that recent developments brought forward the likely
timing of the central bank’s first-rate increase of the cycle. Westpac believes
the RBA will begin the process of raising rates in June.

NEW ZEALAND TRADE BALANCE (WED):
There is not yet a consensus formed for the NZ March trade data, but analysts
at Westpac are expecting a deficit, amid the surge in oil prices. In terms of
the prior month’s metrics, the headline printed at a deficit of NZD 8.37bln;
the breakdown saw exports at NZD 5.49bln and imports at NZD 5.88bln. From a
policy standpoint, the RBNZ is expected to hike rates nonetheless and the March
release will not likely impact pricing.

BOJ PREVIEW (THU): The
Bank of Japan is expected to keep its policy settings unchanged in April,
likely maintaining rates at -0.10% and its QQE with yield curve control to
flexibly target 10yr JGB yields at 0.0%. Its latest Outlook Report is likely to
see growth projections cut and inflation forecasts raised due to effects from
the Ukraine war and China’s COVID outbreak. Traders will also be attentive to
any commentary or measures taken on the currency, given the recent rapid
decline of the JPY, which has seen USD/JPY briefly climbing to 129.00, the
highest levels in around 20 years. The central bank must also contend with a
rising yield environment, which has already prompted it to intervene via
special operations for an unlimited amount of JGBs purchases after yields
breached the top-end of its target range. In terms of the rhetoric on monetary
policy, the BoJ has remained dovish in the face of the policy normalisation by
other major central banks across the world, and Governor Kuroda has reiterated
that it is too early to debate an exit from stimulus policies, adding that the
BoJ will maintain ultra-loose policy to stably achieve its 2% price target, and
is prepared to ease further without hesitation if needed. The data releases
have been varied and support a pause by the BoJ: headline CPI for March was in
line with market expectations at 1.2% and 0.8% for the Core measure, which were
both the fastest increases since October 2018 and January 2020 respectively;
the Tankan data was mixed, where the headline Large Manufacturing Index topped
estimates, although sentiment among Large Manufacturers and Non-Manufacturers
worsened for the first time in seven quarters.

RIKSBANK PREVIEW (THU):
The Riksbank is expected to keep its policy rate unchanged at 0.00% in April,
despite multiple hot CPIF readings and commentary from officials pointing to
earlier than forecast tightening (currently, lift-off is forecast in Q1 2024).
Standing pat on the Repo Rate will likely be justified by the view that the
central bank wants any tightening to be gradual, as expressed by policymakers
Floden and Ohlsson, and more prudently to allow the Bank to communicate a
potential tightening cycle to participants through a formal policy meeting
before its commencement, likely in June with further 2022 hikes thereafter. On
the flip side, market pricing for a 25bps hike in April is now over 90%, with
around 23bps worth of tightening implied. Arguments to begin the tightening
process at the April meeting are supported by headline and core CPIF measures
at levels well above the Riksbank’s “obsolete” February forecasts, and are
seemingly yet to peak. Additionally, an earlier commencement to the cycle may
allow the terminal rate to be lower than if lift-off was delayed – an argument
that has been used by some other global central banks too. Irrespective of the
rate decision, participants will be attentive to how much tightening the
Riksbank is pencilling in this year, and where it estimates the eventual
terminal rate. Elsewhere, the pace of QE was a highlight of the February
gathering after hawkish dissent; the Q3 pace is likely to see a reduction from
the maintained Q2 pace of SEK 37bln.

US GDP (THU): Advance
data is expected to show that the rate of US economic growth slowed to 1% Q/Q
annualised in Q1 after expanding by 6.9% in Q4. As a proxy, the Atlanta Fed’s
GDPNow model is tracking growth of 1.3% in the quarter. However, as is always
the case with the advance data, the consensus view is subject to revisions
given many of the key inputs of the report will be released in the early part
of the week. In terms of the details, analysts at Credit Suisse explain that a
large reversal in inventory accumulation will be the chief culprit of the
growth slowdown in Q1. But while the trade and inventories components are
likely to be a large drag, CS argues that personal consumption should
contribute to the acceleration in domestic demand, business investment has been
rising steadily and is expected to continue, while residential investment
should also remain solid despite the rise in mortgage rates. The commentariat
will naturally focus on the slowdown and the potential for a recession in the
context of aggressive monetary policy tightening by the Federal Reserve as it
tries to put a lid on inflation, and as these high prices weigh on consumer
spending power. But ahead, Credit Suisse is looking for more trend-like growth,
and sees 2022 GDP rising by 1.9% after the 5.5% growth in 2021. „Solid
fundamentals and easy financial conditions now limit the risk of a recessionary
downturn this year, but risks are on the rise from both tighter financial
conditions and growth weakness overseas,“ CS says.

EZ FLASH APRIL CPI (FRI):
Expectations are for HICP to rise further to 7.5% Y/Y in April (prev. 7.4%),
with the core metric (ex-food and energy) seen rising to 3.3% Y/Y (prev. 3.2%).
The March data saw inflation soar to 7.4% from 5.9%, with upside driven by
surging energy and food prices amid the conflict in Ukraine, whilst pressure
was also seen in the core reading following a pick-up in goods and services
inflation. This time around, Moody’s expects an above-consensus 7.9% print with
its analysts of the view that there is “still room for core prices to grow with
costs staying high. Food prices will also contribute largely to the headline
inflation rate, while energy prices will rise further as utility contracts are
renegotiated in view of the higher wholesale prices of the past months”. From a
policy perspective, the upcoming release will be of particular importance given
the increasingly aggressive market pricing triggered in part by commentary from
the typically dovish ECB Vice President de Guindos, who said that a move on
interest rates was possible as soon as July. As it stands, a full 25bps hike is
priced in for the July meeting with three rate rises fully priced by year-end.
Analysts at ING think the release will be a key test for the hawkish pricing,
arguing that a cooling of inflation would be needed for any easing of these
hawkish expectations. The bank notes that such an easing would be required for
markets to realign with their baseline scenario which looks for the ECB to hike
rates in September and December and then twice again next year, bringing the
deposit rate to 0.5% by the end of 2023.

CBR PREVIEW (FRI):
After Russia’s central bank lifted its key rate to 20% in February to stabilise
the currency and ease inflation pressures following the country’s aggression
against Ukraine drew a strong sanctions response from the West, it made an
unscheduled rate cut of 300bps on April 8th. Markets have also been guided to
expect further rate reductions ahead. Speaking to lawmakers this week, Governor
Nabiullina suggested that the central bank would consider a reduction at future
meetings, but did not explicitly say that this could be forthcoming on April
29th; previously she has talked about how officials will assess gradual rate
reductions at future meetings. Deputy Governor Zabotkin has recently said
similar, noting that we should not expect or fear that rates will remain at the
current high levels, and they would be lowered as inflation eases. The CBR
analyst survey this week revealed a view that inflation would not sustainably
fall until 2023, and was set to remain elevated in the near-term. But it won’t
be until 2024 that inflation approaches the central bank’s 4% target, the
Governor has recently argued, adding that combating high prices was the central
bank’s most important challenge. Still, many analysts expect rates to be
lowered again in April; according to Reuters, the head of Russia’s
second-largest lender VTB is expecting the CBR to cut rates to 15% this week,
and sees the key rate at 12-13% by the end of the year. Elsewhere, analysts
will be looking for any updates on the currency, after Nabiullina suggested
that the CBR would consider forex controls to avoid the RUB’s deviation from official
levels.

US PCE PRICE INDEX (FRI):
PCE data for March is expected to show core prices rising by 0.3% M/M (prev.
+0.4%), with the annual rate seen rising one-tenth of a percentage point to
5.5% Y/Y. Although not directly comparable, the US CPI report for March showed
consumer prices rising by 1.2% M/M, lifting the annual rate by 0.6ppts to 8.5%
Y/Y – a forty year high. The core measures, however, rose less than analysts
were expecting (6.5% Y/Y from 6.4%), leading some to declare that the top in inflation
was in. Using the March CPI report as a proxy to estimate how Personal
Consumption Expenditures (which is the Fed’s preferred gauge of inflation) will
fare in the month, analysts at UBS suggested that core PCE prices will have
risen by 0.3% M/M, though they see the annual measure falling to 5.2% Y/Y from
5.4% in February – this would represent the first decline in the 12-month core
PCE inflation measure since February 2021, which the bank says „will mark
the first step past peak inflation.“

US EMPLOYMENT COSTS (FRI):
Employment costs are expected to have risen by 1.1% in Q1, picking up from the
rate of 1.0% in Q4 2021. Although the data is backwards looking, analysts tend
to place more stock in this series rather than the Average Hourly Earnings
metrics within the BLS’ labour market report or the Atlanta Fed’s own wage
tracker – both of the latter measures have outperformed employment costs in the
post-pandemic era. Analysts will be framing the employment costs data within
the context of the current high inflation, and will be looking for any signs
that the current inflationary pressures are feeding so-called second-round
effects – something which is likely to influence how aggressively the Fed moves
to normalise policy in the months ahead.

This article originally appeared on Newsquawk.

I’m not sure if this is the peak of earnings season as measured by the number of companies reporting, but it’s certainly the peak of big names reporting.
Monday morning starts off with Coca-Cola and that afternoon we get economic bellwether Whirlpool. The tech heavyweights go on Tuesday, Wednesday and Thursday, including:

Microsoft
Alphabet (Google)
Meta (Facebook)
Apple
Amazon
Twitter
Ford
Mastercard
DR Horton (largest US home builder)

Probably the scariest big cap tech stock chart out there right now is Alphabet, which on Friday broke through a level that’s been tested four times previously.

Elon Musk is continuing his quest to buy twitter and dropping hints about a tender offer. At the same time, there’s this…
The latest episode starts with a ‚leak‘ of screenshots from Elon Musk’s telephone of SMS messages between him and — allegedly — Bill Gates. They have an appointment to meet at 720 Wednesday Gates texts to say he’s ‚just landed‘. Musk replies „Do you still ahve a half billion dollar short position against Tesla?“
Gates then replies, „Sorry to say I haven’t closed it out. I would like to discuss philanthropy possibilities.“
Musk then replies, „Sorry, but I cannot take your philanthropy on climate change seriously when you have a massive short position against Tesla, the company doing the most to solve climate change.“
It’s not clear when the exchange took place but in Musk’s retelling, he sent the screenshots to friends and the New York Times „must have got it through friends of friends.“
A short time late, Musk tweeted this:

Naturally, the meme was copied and uncredited.
The top reply:

The idea — I guess — is to galvanize some kind of short squeeze on Bill Gates and boost Tesla shares. Or maybe it’s just Elon being Elon.

Canada February retail sales +0.1% vs -0.4% expected
US flash services PMI from S&P Global 54.7 vs 58.0 expected
Fed’s Mester: I’d like to get to 2.50% by year-end
Canada IPPI for March +4.0% versus +2.6% last month (revised from 3.1%)
Kuroda lost in translation
Baker Hughes US oil rig count 549 vs 552 expected
Yellen:Worth considering steps to lower US tariffs on Chinese goods to lower inflation
BOE’s Bailey: There is a risk of second-round effects
BOEs Bailey: We will only do QT in stable markets. Will cease if conditions change
Macron’s poll numbers put him comfortably ahead before Sunday’s vote
Lagarde: Ukraine war may mark a watershed for globalization

Markets:

Gold down $19 to $1932
WTI crude down $2.54 to $101.23
US 10-year yields flat at 2.90%
S&P 500 down 122 points, or 2.8%, to 4271
Nasdaq hits a six-week low
USD leads, AUD lags

For the second day, the market started out in a decent mood and imploded in a move that looks a lot like deleveraging.
The hints of problems in the broader mood were clearest in FX as the Australian and kiwi dollar struggled starting in Asia. In Europe, worrisome comments from Bailey yesterday combined with poor UK retail sales finally led to a clean break of 1.3000 in cable. That extended all the way to 1.2830 in a bruising day with a close on the low.
The euro fell through 1.08 once again but didn’t break the recent lows. That will be something to watch in the week ahead with the April low clocking in at 1.0757, which is just 40 pips from spot.
USD/JPY was taken for a ride as it navigated higher yields, intense risk aversion and some mis-translated comments from Kuroda. Those comments initially boosted USD/JPY to 1.29 but they were taken back hours later and the pair retreated to 128.55. Still, it was an impressive feat for the pair to finish higher despite the ugly mood.
Another area to watch is USD/CNY, which rallied by more than 2% this week. That’s the largest one-week move since August 2015, a week that kicked off some heavy selling in equities as well.
The Dollar Index closed out the week at the highest since the very peak of the pandemic scare in March 2020. Ignoring those two weeks would take it back to 2017. Notably, nearly all trades closed at the extremes of the week, including AUD, NZD, GBP and CAD.
The good news is that it’s the weekend and the Fed blackout period starts on Saturday.

S&P 500 -2.8% down 136 points to 4254
Nasdaq-2.6%
DJIA -2.8%
Russell 2000 -2.5%
Toronto TSX -1.9%

On the week:

S&P 500 -2.8%
Nasdaq -3.8%
Russell 2000 -3.1%

This was the third rough week in a row for stocks and the Nasdaq is now within striking distance of an 11-month low.
Unless you owned Kimberly-Clark or Alibaba, it was a rough day in equity-land. The uniform selling looks like a wholesale deleveraging.

Fed wants to see tighter conditions, though not all at once
I’d rather be more deliberative and intentional than hiking 75 bps
Once at neutral, Fed in a ‚good position‘ to evaluate economy
We need to be resolute in bringing rates back to neutral
Goal is to bring inflation under control but also sustain expansion and labor markets

Ther’s been a small respite for risk trades on her comments, but you have to squint at the chart.

The US dollar is at the highest levels since the dawn of the pandemic and has surged higher today.
What’s happening?
In short, the market is no longer convinced that global central banks can tame inflation without a major hit to growth. Maybe that’s not a recession but it’s a much slower growth paradigm than assumed.
Eight months from now, the Fed funds futures market is priced for 2.75-3.00% overnight rates after a series of at least three 50 bps hikes to start. The overnight rate hasn’t been that high since 2007 and we just don’t know what the economy will look like when it gets there.
The market is saying that global central banks are behind the curve and will need to over-tighten to halt inflation.
„We are walking a very tight line between tackling inflation and the output effects of the real income shock, and the risk that could create a recession,“ said Bank of England Governor Andrew Bailey today.
Yesterday, Powell had this to say:
Our goal is to use our tools to get demand and supply back in synch…and
do so without a slowdown that amounts to a recession,“ he said. „It
is going to be very challenging.“
Not just inflation
Previously, the market was convinced that central banks had plenty of latitude to hike rates at a gradual pace to cool inflation but two things have changed in 2022.
1) The Ukraine war catalyzed commodity inflation
2) China is on lockdown, snarling supply chains again
The market put on the rose-coloured glasses on both fronts for a time but it’s now clear that both aren’t going anywhere. Plus, with inflation continuing to ramp up and central banks now taking a more-hawkish tilt, the risks have hit a point that’s intolerable for the bulls.
Combine that with the irrational exuberance in stay-at-home tech stocks during the pandemic and the resulting bubble burst and it’s a minefield out there.
Ultimately, what’s made me have a rethink is the performance of commodity producers this week. Commodity prices have largely held up this week but producers are being rocked.
Alcoa reported good earnings this week and the commentary in the conference call was overwhelmingly upbeat. Yet here’s the chart:

That’s a 23% fall this week.
It’s not an isolated case either. Freeport McMoran is down 18% and others to a less extent.
If I had to name the watershed it would be the latest IMF global growth forecasts released this week. Those sets of numbers generally tell people what they already know but this time the report seemed to galvanize sentiment. The 2022 global GDP forecast was ratcheted down to 3.6% from 4.4%.
If you look at those forecasts as more of a snapshot of the consensus a month ago, then layer in faster rate hike scenarios since then — you can easily get below 3%. For instance, China was only lowered to 4.4% from 4.8%. Given the covid state-of-play, that’s optimistic.
In addition, here’s a look at 2023 forecasts. If you’re concerned about higher rates and a deeper slowdown, there isn’t much room for error:

UK +1.2%
Italy +1.7%
Eurozone +2.3%
US +2.4%

What does it mean for the currency market?
The pictures tell the story. GBP/USD has clung to 1.30 as important support since mid-March. It crashed through today to the lowest since October 2020.

The New Zealand dollar chart (which looks an awful lot like the Nasdaq) also crashed through the 61.8% retracement of the March rally. It still has some breathing room before the January low but today’s price action is a sign of things to come unless the market mood reverses.

There is still plenty to like with commodity currencies: I think this will be a bullish decade for natural resources due to underinvestment and the green transition. But the rallies are likely to go ‚on pause‘ until we see global central bank hawkishness dialed back.
When will central banks get off the brakes?
That’s the big question.
I can make a compelling case that we’ve already priced in maximum hawkishness. A 2.71% return in two-year Treasury is a decent yield in a time of uncertainty. 
I think the Fed also underestimates just how much leverage is out there. We saw it at the start of the pandemic when bonds imploded before the Fed started buying in unlimited amounts. Financial markets are built on a shaky foundation of wildly over-leveraged trades.
The basket of things that work at a 3% overnight rate compared to 0.1% is infinitely smaller. To get there will require some heavy unwinds and no one knows what that looks like. I fear that it isn’t pretty.
The Fed is going to announce an unwind of its balance sheet on May 4. They’ve already stopped net purchases.
It’s a good bet that Powell will see some turmoil in markets along with growth fears and try to dial back aggressive rate hike expectations so maybe that’s when the coast is clear. The Fed has been a great friend to markets for many years.
At the same time, inflation is a real problem and Fed comments suggest they’re running scared. Powell yesterday said the jobs market was ‚unsustainably hot‘ and that taming inflation was ‚absolutely essential‘.
„We have had an expectation that inflation would peak around this time
and come down over the course of the rest of the year and then further,“
Powell said. „These expectations have been disappointed in the
past…We are not going to count on help from supply side healing. We
are going to be raising rates.“
Watch the Canadian dollarOne currency that I’m particularly worried about in the context of higher rates is the Canadian dollar.The Canadian housing bubble is in the process of popping and the decline will be dramatic. At this point the bull case is that prices fall 20% and Canadians shrug it off because it was all found money anyway.What’s important to remember is that the Canadian and US housing markets have fundamentally diverged. Canadian prices are much higher but structurally, the housing market is also much more vulnerable. That’s because variable rate mortgages are highly popular and have grown even moreso as rates have risen. That means that the freshest money that bought homes at the highest prices is also most vulnerable to higher rates. There’s no room for error there. In addition, even fixed rates in Canada are only for five years so around 20% of those roll over every year and they’ll be resetting higher. In the US, the 30-year fixed is standard so the only real pain is on the new buyers and sellers. The absolute kicker is that it’s not really the Bank of Canada that sets the rates for Canada.Surely you think I jest but I’m serious. Canadian mortgage rates are set around the 5-year government of Canada note. The BOC has some impact on where that trades but the biggest determinant is where Fed funds are.In a nightmare scenario for the Canadian economy, the housing markets goes into a crash and even with the BOC dropping rates to zero, the Fed is still hiking or holding rates at a high level. Perhaps the BOC could counteract some of that with QE but the result would be a significantly weaker loonie.The odds of an outcome along those lines are growing.