The battle to control inflation | 20 5月 2022

The battle to control inflation


In a fifth straight week of net selling, investors liquidated equity funds worth $10.53 billion, compared with just $1.65 billion worth of net selling in the previous week, which cemented expectations of aggressive rate hikes by the Federal Reserve. Selling continued in U.S. growth funds for the seventh straight week, amounting to $4.5 billion. Value funds also posted an outflow, worth $1.99 billion, after a week’s inflow. Among sector funds, financials, industrials, materials, and tech lost $1.24 billion, $756 million, $677 million, and $468 million, respectively, in outflows. The U.S. benchmark 10-year Treasury yield hit a 3-1/2-year high of 3% last week on fears over higher inflation levels. U.S. headline consumer prices rose 8.3% in April year-on-year, beating economists' forecasts for 8.1%. This is a negative signal for the stock market!

Trading recommendation: sell 4070 and take profit 3910.

The battle to control inflation


The market is continuing to be pushed by the prospect of a European Union ban on Russian oil tightening supply. Preliminary March data showed total OECD commercial oil stocks increasing m-o-m by 10.1 mb. At 2,621 mb, inventories were 298 mb lower than the same time a year ago, 304 mb lower than the latest five-year average, and 293 mb below the 2015–2019 average. In terms of days of forward cover, OECD commercial stocks fell mom by 0.3 days in March to stand at 57.4 days. This is 8.8 days below March 2021 levels, 8.7 days less than the latest five-year average. This is a positive signal for oil prices!

Trading recommendation: buy 104.44 and take profit 108.77.

The battle to control inflation


Gold fell, as the dollar's strong run with more aggressive U.S. interest rates on the horizon sapped appetite for bullion. U.S. Federal Reserve Chair Jerome Powell said that the battle to control inflation would "include some pain", as the impact of higher interest rates is felt. Gold is being weighed down as the Feed has been committed to raise interest rates at a fast pace and in addition, the dollar has been extremely strong. Although seen as an inflation hedge, bullion yields no interest and is sensitive to rising U.S. short-term interest rates and bond yields.

Trading recommendation: sell 1817 and take profit 1778.


David Johnson
Analyst of «FreshForex» company

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