Markets crippled by inflation fears

Another wave of risk aversion engulfed markets this morning after Wall Street closed in a bear market overnight and Treasury yields jumped to levels not seen in more than a decade. As concerns intensify about soaring inflation, investors are fearful of aggressive rate hikes from the Fed tipping the US economy into a recession. This theme continues to empower king dollar while punishing gold which shed 2.8% on Monday, trading below $1830.

Interestingly, European and US futures are flashing green, suggesting stocks could claw back losses today. However, with the S&P 500 plunging back into the red danger zone, bulls may have a steep hill to climb.  Inflation jitters and recession fears are likely to foster a sense of caution across global markets with the sentiment pendulum swinging further away from risky assets.

On the data front, there is a wealth of key economic data from major economies to keep investors well-occupied throughout the week.  Later this morning, the results from the German ZEW investor confidence survey are expected to show a touch less pessimism about the country’s economy. The major risk events will be the FOMC rate decision on Wednesday, the Bank of England meeting on Thursday and the Bank of Japan meeting on Friday.

Dollar dominates ahead of Fed

The dollar kicked off the week on a firm note as investors evaluated last Friday’s red-hot US inflation figures and China’s latest Covid developments. US inflation unexpectedly accelerated to 8.6% last month which poured cold water on hopes of prices peaking. Such a development rocked markets and fueled fears of more aggressive interest rate hikes by the Fed. With traders now seeing the high chance of a 75-basis point hike by the Fed this week, this should keep the dollar bid.

The main attractions at Wednesday’s meeting are likely to be the economic projections, dot plot, and most importantly Fed Chair Powell’s post-meeting press conference. If he strikes a hawkish tone and signals the Fed maintaining its aggressive approach toward rates, dollar bulls could be empowered. Alternatively, a cautious-sounding Powell may cool rate hike bets, limiting the dollar’s upside gains.

Oil prices steady for now

Oil prices held steady on Tuesday morning as market players evaluated the tight supply outlook and China’s Covid developments. Bulls could run out of steam if recession fears and fresh Covid-19 curbs in China not only hit the demand outlook but overshadow tight global supplies. Looking ahead, oil prices may be influenced by the weekly U.S inventory data from the American Petrol Institute (API) on Tuesday and Energy Information Administration (EIA) on Wednesday. Given how the global commodity remains pulled and tugged by various fundamental forces, the next few days could be interesting.

Looking at the technical picture, the upside momentum could take prices back towards levels not seen since March 2022 around $130. But a decline back under $118 may encourage a selloff towards $110.      

Commodity spotlight – Gold

Gold took a real beating yesterday, sinking almost 3% as investors priced in the chance for a 75-basis point US rate hike following last Friday’s smoking hot inflation figures. The precious metal was treated without mercy by an appreciating dollar and soaring Treasury yields, with prices trading around $1830 as of writing. Gold could be in store for more pain on Wednesday if Jerome Powell strikes a hawkish tone or signals that the Fed will maintain its aggressive approach toward raising rates.

Looking at the technical picture, prices are trading below the 50, 100, and 200-day Simple Moving Average while the MACD trades below zero. A solid daily close below $1800 could signal a decline back towards recent lows at $1765. Should $1850 prove to be reliable support, a move towards $1870 and $1900 could be on the cards.