Investors worried about slowing global economy

November 29, 2022

US stocks declined sharply on Monday, witnessing heavy selling and were dragged down by safe-haven demand as investors were concerned about a global slowing economy and the spread of coronavirus in China. Investors’ sentiment soured as Federal Reserve officials stressed that more rate hikes are coming, as New York Fed President John Williams on Monday said that he believes the Fed will need to raise rates to a level sufficiently restrictive to push down on inflation.

However, investors are now looking ahead to Jerome Powell’s speech Wednesday, with many economists expecting he’ll cement bets that the Fed will slow its pace of rate increases next month. Moreover, China’s prolonged Covid restrictions weighed on investor sentiment as local governments tightened Covid controls and case numbers last week hit records since the pandemic began. On the Eurozone front, European Central Bank (ECB) policymaker Peter Kazimir said earlier in the day that the risk of recession in the Eurozone was growing, which exerted bearish pressure on the Euro.

The benchmarks, S&P 500 and Dow Jones Industrial Average both declined lower on Monday as the S&P 500 pared its monthly gain amid hawkish comments from Fed Bank of St. Louis President James Bullard. The S&P 500 was down 1.5% daily and the Dow Jones Industrial Average dropped lower with a 1.4% loss for the day. All of the eleven sectors in the S&P 500 stayed in negative territory as the Real Estate sector and the Energy sector are the worst performing among all groups, losing 2.80% and 2.74%, respectively. The Nasdaq 100 meanwhile dropped with a 1.40% loss on Monday and the MSCI World index was down 1.4% for the day.

Main Pairs Movement

The US dollar advanced higher on Monday, regaining upside traction and extending its daily gains towards the 106.50 area amid a downbeat market mood. The hawkish comments from the Federal Reserve (Fed) policymakers and the Covid woes emanating from China both acted as a tailwind for the haven greenback. The President and CEO of the Federal Reserve Bank of St. Louis have said that rates need to go higher to bring inflation down.

GBP/USD retreated sharply on Monday with a 1.10% loss as the cable dropped to a daily low near the 1.1940 mark in the late US trading session amid a risk-off market sentiment. On the UK front, there will be several BoE members due to speak this week, including BoE governor Andrew Bailey on Tuesday and chief economist Huw Pill on Wednesday. Meanwhile, EUR/USD suffered from daily losses and retreated towards the 1.0360 level amid a stronger US dollar across the board. The pair was down almost 0.53% for the day.

Gold tumbled lower with a 0.77% loss for the day after extending its daily slide to the $1,741 area during the US trading session, as China’s Covid-19 riots across the country weighed on the precious metal. Meanwhile, WTI Oil advanced sharply with a 1.26% gain for the day as OPEC+ is seen considering deeper output cuts amid a faltering market.

Technical Analysis

EURUSD (4-Hour Chart)

The EURUSD lost its traction in the second half of the day and declined below 1.0400, with Wall Street’s main indices pushing lower after the opening bell amid renewed China coronavirus jitters, the US dollar started to gather strength and forced the pair to turn south. Investors adopted a cautious stance to begin the week as China reported record-high coronavirus infections for the fifth straight day on Sunday. The Euro Stoxx 600 index is down nearly 1% on the day and US stock index futures are losing between 0.5% and 0.7%, reflecting the sour market mood.  At the meantime, European Central Bank policymaker Peter Kazimir said earlier in the day that the risk of recession in the Eurozone was growing. However, another ECB policymaker Klaas Knot argued that recession was not a “foregone conclusion.” The president of ECB, Christine Lagarde, will testify before the Committee on Economic and Monetary Affairs (ECON) of the European Parliament in Brussels. In case Lagarde acknowledges the rising risk of a prolonged economic downturn in the Eurozone, the pair could lose its traction, vice versa.

From the technical perspective, the four-hour scale RSI indicator fell sharply following the opening of American trading hour and 46 figured as of writing, suggesting that the pair was surrounded by heavy selling pressures. As for the Bollinger Bands, the pair was testing the lower band around the 1.0338 level. We think if the price fell below the lower band, the pair was more favoured to the downside path shortly.

Resistance: 1.0497, 1.0604

Support: 1.0228, 1.0163, 0.9961

GBPUSD (4-Hour Chart)

The GBPUSD came under heavy bearish pressure and declined under the 1.2000 level as of writing. In the absence of high-impact data releases, the renewed US Dollar strength and the negative shift witnessed in risk mood force the pair to stay on the back foot. The president of the Federal Reserve bank of St.Louis has said that rates need to go higher to bring inflation down and the recession is not inevitable, which provides a boost for the US Dollar, which, in turn, weighs on the pair. Apart from this, Coronavirus-related news from China forced investors to adopt a cautious stance at the beginning of the week and caused the British Pound to edge lower. China’s National Health Commission reported over 40K new coronavirus cases on Sunday, reviving concerns over China’s zero-Covid policy weighing on global economic activity. The DXY index witnessed fresh transactions during the US trading session, rebounding from the daily low to 106.48 level at the moment of writing, further hurting the GBPUSD pair.

From the technical perspective, the four-hour scale RSI indicator dropped to 40 figures as of writing, suggesting that the pair was amid strong negative traction. As for the Bollinger Bands, the pair was pricing below the lower band, indicating that the downside tendency would persist until returning above the under the band.

Resistance: 1.2124, 1.2253

Support: 1.1765, 1.1645, 1.1363

XAUUSD (4-Hour Chart)

The XAUUSD tumbled after hitting a fresh weekly high at $1763 marks, as the US Dollar regained bullish momentum during the American trading session. The president of the Federal Reserve bank of St. Louis, James Bullard, has said that rates need to go higher to bring inflation down and recession is not inevitable. In addition, the New York Fed Bank president, John Williams, said that he believes the Fed will need to raise rates to a level sufficiently restrictive to push on inflation and keep them there for all of next year. These hawkish comments provide support for the US Dollar, which undermined the Dollar-denominated gold. Furthermore, global equities are trading in red, as China protesters take the streets sparked by the Covid-19 zero-tolerance policy and mass testing. According to Bloomberg, “the protests are shaping up one of the biggest threats to the Communist Party since the 1989 Tiananmen crackdown,” keeping the yellow metal defensive.

From the technical perspective, the four-hour scale RSI indicator dropped dramatically to 41 figures as of writing, suggesting there is a heavy bearish pressure weighing the XAUUSD pair. As for the Bollinger Bands, the gold was breaking through the lower band and aimed for the multi-week low of $1729 marks. Gold was more favoured to the downside path shortly unless there is any big change in the market risk sentiment.

Resistance: 1784, 1800

Support: 1748, 1704, 1671

Economic Data