Monthly Market Outlook

April was like a calm after the storm for the markets. Banking worries lessened significantly, at least until First Republic Bank’s earnings report. US inflation numbers eased further, earnings from tech giants were above expectations, and there were no ECB or FED meetings to contend with. 

Moving into May, the calm could end pretty quickly with three big central bank decisions scheduled for the first week. Bank deposits started to fall again, and on top of that, there is a looming debt limit to consider. May might bring back some volatility to the markets. 

Macro View 

After a decrease in liquidity usage from the FED’s backstop channels and some deposit inflows, banking stress has not completely vanished. For two weeks in a row, backstop usage has been increasing, and bank deposits are experiencing new outflows. 

First Republic shares fell as much as 60% after the earnings report, starting a new wave of pessimism in the markets. Major banks deposited billions of dollars to stabilize First Republic Bank, but now even those deposits are in question. The FDIC has even discussed lowering the bank’s assessment, although it could surely trigger a failure because the bank would lose access to several FED lending facilities. 

Fears of a recession are also affecting market pricing. The US and EU’s first-quarter GDP prints fell short of expectations, with the US growing 1.1% versus the expected 1.9% and the EU growing 0.1% versus the expected 0.2%. Despite the weaker-than-expected GDP data, PMIs are showing a different story. The US, EU, and UK composite PMIs rose to 53.5, 54.4, and 53.9, respectively. Future PMI forecasts also show that they will stay above the 50 threshold throughout the year, indicating that no recession is in sight, according to businesses and future orders. Of course, there is still much uncertainty in the markets, but passing this year with low growth is the baseline scenario according to current data and both the ECB’s and FED’s projections. 

The FOMC decision will be on Wednesday, and the markets expect a 25 basis point hike with over an 80% probability. The general expectation is that the FED will hike one more time and then hold for a while before starting to cut rates later this year. However, FED members do not expect any cuts this year, which is where the markets and the FED diverge. This divergence can be priced in rather quickly, depending on the FOMC statement or Powell’s press meeting, and can increase market volatility. 

Inflation seems to have been slowing down, but core inflation is still high. With the recent production cut from OPEC, China’s reopening, and higher orders, the fall of inflation may slow down in the coming months. The tight job market is also something to watch, despite the sharp fall from the JOLTS data and slightly higher weekly claims throughout April. 

Another point to watch will be the forward guidance on the possibility of further hikes. The FED probably wants to add to the statement that further hikes could be implemented if necessary, but how determined the language might be is important. Also, there are other topics to watch, such as the SVB report on banking conditions and the recession expectation of the FED’s staff, which is on the FOMC minutes but was not even discussed in the press conference at all. Overall, the FED will guide the markets on the rate path and possible new steps for banking supervision. 

The ECB is set to meet on Thursday, and a 25 basis point hike is now fully priced in. Some members, like Schnabel, have suggested that 50 basis points could be on the table, but there is currently not enough support for sharper hikes. Even though there is no support for 50 points, further hikes after May are highly likely. Markets expect three hikes and a hold from the ECB in the next four meetings, which is quite realistic. However, ECB rates are still much lower than the FED, and underlying inflation shows no signs of slowing down; on the contrary, it appears to be in an uptrend. The ECB still has some catching up to do. The bad news for the ECB is that Eurozone growth is much weaker currently, and it will be a difficult path to control inflation and avoid causing a recession. Despite high composite PMIs, manufacturing PMI data signals some alarm bells by falling to 45.45 from 47.3, indicating a rapid slowdown in manufacturing activity. 

In Japan, the first BOJ meeting with Ueda at the helm was highly anticipated by the markets. However, the BOJ did not make any changes to the yield cap or negative rates, nor did they indicate any plans to do so, aside from scrapping the “current or lower” rate guidance. The BOJ will begin a review of its policies, but this process is expected to take 1-1.5 years, and Ueda has stated that this does not necessarily mean any changes will be made during that period. This news was a massive blow to Yen bulls, as the USDJPY surged on the final day of April following the BOJ’s decision to maintain its ultra-loose policy. 

The Reserve Bank of Australia will hold a meeting on May 2nd, making it the first central bank to do so. The markets are not expecting any changes, with further rate hikes being put on hold, and this holding pattern likely to continue. While the RBA may still go for another 25 basis points in the coming months, it appears that the hiking cycle for Australia is nearing its end. 

Central Bank Meeting Calendar 

Technical View 

The US 10-year yield fell sharply after the banking turmoil started. The uptrend from 2022 seems to be over and a low-sloped downtrend has been formed. Treasury bulls should watch out for the 3.15-3.30 zone, which is a massive supply zone at the moment and is also near the lower line of the trend channel. But overall, the yield top seems to be limited to 4% if no significant changes happen with inflation. 

Brent‘s flat zone seems to be well-established at the moment, between $75 and $90. While the upside seems to become limited with $90 for the moment, OPEC wants to hold the price and not allow another bear market now. At the beginning of April, OPEC went for a supply cut with more than a 1 million bd cut (excluding Russia) to hold falling prices which looks like working for so far. 

Precious metals continue to enjoy heightened risks and gain value against the dollar. Silver and platinum were at the forefront, while gold struggled to pass key resistances throughout the month. Palladium made some significant gains within the month, but could not hold onto most of them and finished April with around 4.5%. 

The gold/silver ratio is favoring silver again, which is a good indicator for precious metals. As the ratio turned flat in the middle of April, gold’s advances came to a halt as well. Both silver and gold are now facing serious resistances. If a pullback starts, it will most likely begin with silver first. Therefore, silver should be in the spotlight for all precious metal traders in May. The gold/silver ratio is favoring silver again, which is a good indicator for precious metals. As the ratio turned flat in the middle of April, gold’s advances came to a halt as well. Both silver and gold are now facing serious resistances. If a pullback starts, it will most likely begin with silver first. Therefore, silver should be in the spotlight for all precious metal traders in May. 

Gold ETFs had some inflows, but not as strong as expected, after deposits flew away from banks. Most of the runners turned to money market funds or stocks, which is not looking well for gold. Gold has risen around 8.80% since the start of March, but the fall of the 10-year treasury since then is over 12%. Gold’s advantage over treasuries, however, can be the debt limit talks in the coming months. 

Gold has been trending up since October, reaching over 2000 from below 1700 in a matter of months. Now the price seems to be struggling to find any direction near the middle of the uptrend channel. If the risks stay high (banks, debt limit, recession, etc.), gold has the potential to bounce from just below 2000 to near 2100, as well as to fall around 1900 if the Fed stays hawkish and risks are eased. The levels of 1975 – 1945 may be good supports to follow for direction. 

After the massive run, silver is consolidating above the key support level of 24.5 at the moment. This support level can be the pivot point for the month. If the price falls below it, silver’s buying pressure could ease, but as long as it holds, silver bulls will be more active. Similar to gold, global risks and central banks’ hawkishness will be the key factors to follow for direction. 

The dollar index had a calm month in April, with the 101 support still holding, but there are no signs of any upward moves as well. FED and ECB decisions could create some long-awaited volatility for traders. Below 101, 99.25 could become the first key support to follow, while for upward moves, 103 and 105.18 are the levels to follow. 

The stock markets had another good month. The weaker link of May, the Dow Jones, rose 3.53%, while Nasdaq was the slowest in April after the massive 10% gain in May. Nasdaq was in the red until the last two days, but good earnings reports from Microsoft, Alphabet, and Amazon lifted the index up very quickly. DAX and S&P 500 rose more than 2.5%. 

VIX has formed two lower highs and is now nearing the lowest level since 2021. Whenever VIX forms a downtrend, the S&P 500 usually starts an uptrend as well. If the current trend continues for VIX, the S&P 500 could be on the brink of another months-long uptrend as well. 

The S&P 500 is testing the key level of 4200 again. A breakout could be a strong indicator for more upside. However, 4200 has been both a strong resistance and support for the last two years, so passing that could be difficult for S&P bulls. As the resistance is being tested, momentum has also slowed down a bit, with the Relative Momentum Index (RMI) falling just below its moving average, giving a rare sell signal which has worked successfully at the last five sell signals. The direction of the S&P 500 will be determined by incoming earnings reports and the FOMC meeting. 

The FX market had a calm month in April, with perhaps the only exception being the Japanese Yen. EURUSD and GBPUSD made over 1% gains while CHF was one of the strongest currencies throughout the month. JPY had a weaker month because of the Bank of Japan. Ueda, the new chair of BOJ, just concluded its first meeting but did not make the JPY bulls very happy with continuing ultra-loose policies. 

EURUSD has been in an uptrend channel since late September and also formed another short-term one since the middle of March. The green trend channel now collides with the resistance zone of 1.1040 – 1.11. If this zone can be passed, EURUSD might continue its advances. However, a break below the trend could trigger a downward wave to the longer timeframe trend channel’s lower line, which is currently at 1.0670. 

According to the COT report, net non-commercial Euro positions are near their highs, which could be a bad thing for EURUSD. Whenever Euro longs accumulate too much, EURUSD has made significant losses. Since the 2008 crisis, EURUSD has made such moves four times with an average retreat of 19.35%. But all of those happened after at least two tops were formed. Now the first top has not been formed yet, so there could still be more upside for EURUSD before a big retreat, according to this signal. 

The Germany-US real yield spread continues to heavily dictate the direction of EURUSD. Our model suggests that EURUSD could rise as much as 1.1475 in the coming months if the current situation does not change too much. The correlation between the two has become even steadier since November. Any change in the German-US yield spread should be closely followed for EURUSD direction. 

GBPUSD stabilized over the 1.2385 in April and now trying to start a new upward wave. Markets expect 2 or 3 more 25 basis points of hike from Bank of England after higher than expected CPI and core CPI numbers, one of them probably happen in 11^th of May. As long as GBPUSD stays above 1.2385, bulls could stay in control and take the price to over 1.28. 

USDJPY broke out of its downtrend in April and is now moving in a modest uptrend channel. After the Bank of Japan made no changes to the yield cap and negative interest rates at Ueda’s first meeting, USDJPY broke through the key 135 resistance level. The BOJ has started a monetary policy review which could take up to one and a half years. According to Ueda, this does not necessarily mean that any policy changes will be made during that period, which is more bad news for JPY bulls. Around 139.60 could be a good target for upward moves, as the upper line of the trend channel and the middle point of the October-January fall converge. Downward moves could be buying opportunities as long as the BOJ does not hint at a possible policy change.