Daily Market Commentary 23rd May 2022

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A wild rollercoaster of a final session on US equity markets, to close out another extremely volatile week of trading. US markets have suffered another volatile week of trading, stemming from concerns over inflation driving higher interest rates and the very real prospect of recession. US Retail giants, Walmart and Target, announced serious impacts from rising transportation costs and supply-chain issues, sending share prices plummeting. The Retail sector is now under close scrutiny, as supply-chain constraints, input cost increases and transportation costs skyrocket, which are now materialising in share prices. The supply side of the equation is grim, but the demand side may be where the real problems are coming from, as rising inflation, cost-of-living and crashing disposable incomes, will almost certainly result in a severe recession. The UK and Europe are already suffering an energy crises and about to experience a food crises, due to sanctions imposed on their major resource supplier, Russia.

US Bond Yields have been softer and the US Dollar has drifted, allowing the EUR to regain 1.0550, while the GBP has rebounded to 1.2500. Inflation remains the key economic indicator, as this is driving Central Banks to raise interest rates and reduce liquidity. The IMF economists have talked down inflationary pressures and forecasts a peak, but this rings of courageous optimism, or perhaps political semantics in an effort to avoid monetary and fiscal action, needed to combat rampant inflation?

Commodity currencies have been beneficiaries of the rising commodity prices, as the AUD regained 0.7000, while the NZD looks to regain 0.6400. These currencies are not immune to the supply-chain problems and global inflation and this will be highlighted in the RBNZ rate decision, this coming week. The Central Bank will raise interest rates, it is just a question of by how much? Will they contract the balance sheet, reduce liquidity and refrain from debt monetisation? The Australian Election provides some serious entertainment for political groupies.

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