The increasing likelihood of global recession | 23 September 2022

#SP500:

The focus for US equities continues to be on the macro environment, and how hawkish the Fed will act to tame inflation. Stocks with strong value characteristics such as high earnings yield strongly outperformed both the broader market, measured by the S&P 500, and stocks with high growth characteristics. The value factor’s outperformance was driven largely by investors fleeing to the perceived safety of higher yielding stocks amidst four–decade-high inflation and a rising rate environment, as well as the high concentration of energy and other commodity producer stocks. Subsequent economic reports showing continued strong jobs and retail activity, and a disappointing August inflation report reinforced the market view that rate hikes will continue and the Fed will need to remain hawkish for longer.

Trading recommendation: sell 3915 and take profit 3811.

XAUUSD:

The Fed will likely increase interest rates by at least 75 basis points at its meeting this week to take its short-term interest rate to 3.25% (upper bound). Assuming the Fed does raise rates by 75 bps it would be the third time this year. Over the previous 30 years, the Fed only raised rates by 75 bp one other time. So, the Fed is taking the inflation problem seriously with these jumbo-sized rate hikes. Fed Chairman Jerome Powell has admitted that the Fed’s tools don’t work on supply-related challenges. So why, then, is the Fed continuing to push interest rates higher in an attempt to slow the economy? Frankly, it’s to make sure inflation expectations don’t become unanchored. High interest rates are negative for the precious metals market.

Trading recommendation: sell 1674 and take profit 1650.

#WTI:

A spill at Iraq's Basra terminal appeared likely to constrain crude supply. The spill at the port, which has four loading platforms and can export up to 1.8 mln barrels per day, drove up prices on the prospect of lower global crude supply. That definitely threw a scare into the market because the initial report was that those barrels were going to be out of the market for some time. This is a positive signal for oil prices. Investors are bracing for a large increase to U.S. interest rates, which could lead to a recession and reduce fuel demand. The Federal Reserve is widely expected to raise its benchmark overnight interest rate by 75 basis points at a Sept. 20-21 policy meeting. This is a negative signal for oil prices.

Trading recommendation: range 81.85 -85.50.