Fresh Contract Highs For Dollar Index

STOCK INDEX FUTURES

Global equity markets overnight were lower with the exceptions the markets in China and Russia. With the markets knifing downward yesterday following many favorable corporate earnings results and failing to hold up in the wake of very upbeat (historical record revenue projections from airlines) the travel and entertainment sectors of the market look to be recovering impressively. Earnings announcements will include American Express, Newmont and Kimberly-Clark before the Wall Street opening.

S&P 500: As indicated already, the airlines and the travel and entertainment industries have exited the pandemic debacle or are poised to exit the pandemic debacle. However, the overriding focus of the market remains on very hawkish Fed dialogue, the potential for real rates to rise further and those views have resulted in siphoning of money from equity holdings. In fact, Bank of America yesterday projected equity funds saw the largest weekly year-to-date outflow of $17.5 billion. Furthermore, European equity funds saw the 10th straight week of outflows of $2.9 billion from equities with the heaviest outflow coming from the financial sector.

Other US Indexes: Despite a series of favorable corporate earnings from key bellwether companies this week, the bottom fell out from under the Dow yesterday and the trade has extended on the downside this morning.  The NASDAQ also had the floor fall out from under the index yesterday despite proof that Elon Musk had the financing to undertake the $46.5 billion takeover of Twitter.

CURRENCY FUTURES

DOLLAR: With a fresh contract high early this morning following an aggressive 2-day washout, the overbought technical condition of the dollar was moderated, thereby clearing the way for another wave of buying. Apparently, the subtle hawkish shift by the ECB yesterday is of little concern to the bull camp in the dollar. In fact, the ability to rally through overnight predictions of a “top” in the dollar, off a widespread acceptance of two sequential 50 basis point US hikes (and widely held beliefs that every Fed meeting this year will bring rate hikes) suggest to us that the market has not fully factored in the likelihood of further widening of the US interest rate differential edge.

EURO: With the dollar remaining in vogue, the hawkish shift by the ECB yesterday has been brushed aside. However, the euro has shown respect for the 108.00 level for two straight weeks and therefore it is possible the euro is nearing a value zone. However, near term targeting is seen down at 1.0774.

YEN: While the Yen has managed to build a consolidation zone this week around 77.90, the trade does not respect the ability of the Bank of Japan to keep up with other central bank hikes and the trade does not respect the Bank of Japan’s ability to reverse the downtrend in the Yen with intervention. Even classic fundamental economic reports on PMI and inflation overnight from Japan failed to lift the Yen.

SWISS: Like gold, the Swiss continues to abandon its historic flight to quality standing in the face of the war and is also unable to stand up to the unrelenting dollar rally.

POUND: Very negative UK GfK consumer confidence for April and very disappointing UK retail sales for March justify the significant range down failure in the Pound this morning. While the markets expect higher rates from the Bank of England ahead, the Pound is another currency facing a condition where their central bank is not expected to keep pace with the US.

CANADIAN DOLLAR: While many markets have started to embrace the view that inflation has “peaked”, the Canadian trade has seemingly fully embraced a tempering of inflation this morning. In fact, the Canadian dollar continues to plummet despite Bank of Canada suggestions they would not rule out larger rate increases ahead.

INTEREST RATES

In retrospect, the avalanche of hawkish Federal Reserve dialogue this week was largely anticipated, but ultimately came down more aggressive than was expected. In fact, the Federal Reserve chairman yesterday suggested he would not be against frontloading the attempt to control inflation with two straight 50 basis point rate hikes in the next two Fed meetings. In fact, the Fed chairman referenced the greatest and most successful inflation fighting Fed chairman ever (Paul Volcker) and suggested he takes a lot of guidance from the former Fed chairman.

On the other hand, a 20-year US treasury bond auction earlier in the week showed strong demand which in turn might signal rates have reached a level deemed attractive by a portion of the investment community. Furthermore, overall economic sentiment is softening along with significant weakness in equities and less pound away upside action in energy and grain prices and that could temporarily tamp down big picture/longer-term position. In other words, a halt in uptrend action in commodities probably increases the chance of a temporary bounce in Treasuries.

The North American session will start out with the March Canadian industrial product price index (IPPI) which is expected to have a sizable downtick from February’s 3.1% reading. February Canadian retail sales are forecast to have a sizable downtick from January’s 3.2% reading.