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  • Markets Tumbled as Investors Positioned for CPI, Nobody Smokes for Oil Crash, Forex (Euro)

Markets Tumbled as Investors Positioned for CPI, Nobody Smokes for Oil Crash, Forex (Euro)

By on July 13, 2022 0


Stocks faltered as investors positioned themselves ahead of today’s CPI report.

US IG Credit closes unchanged 3bps higher, rates rallied and equities fell (SPX: -0.92%, DJIA -0.62%, NDAQ -0.95%), reflecting uncertainty felt by investors ahead of Wednesday’s US CPI print. The Treasury curve inversion deepened to levels last seen in 2007 – the 2s10 spread was as low as -12.4bp before ending around -9bp after the auction at 10 years caused a further steepening of the curve.

In general, the stock market can handle risk relatively well. But the current pattern of persistent inflation, rapid Fed tightening, upside/downside risks and excessive rate volatility, to name a few, has at times left investors helpless. And with the market melting towards a bearish consensus, stocks are struggling to sustain a meaningful rally.

With some recession risk priced into the market, the multiple should see a slight increase if today’s CPI print finally marks an inflation spike; it should mitigate the likelihood of an extreme bearish case of unmanageable inflation and higher rates which could then reframe sentiment into a mild recession. Result: a higher probability of a slight downturn reduces the probability of an extreme bearish case under a stagflationary regime.

Also, it looks sufficiently favorable to the market that refining crack spreads are narrowing and gasoline futures are looking less backward. Demand destruction, perhaps. Still, lower gasoline prices are a prerequisite for the mild recession “bullish” scenario, a massive improvement from the stagflationary bearish scenario that all roads seem to lead to.

Oil prices

Crude prices fell almost 8% to end at their lowest level since April 12. as President Biden visits Saudi Arabia to discuss ways to boost production.

No one is convinced today that crude prices are weak, but I would say it’s a combination of a few factors.

Oil prices slumped as fears of demand destruction intensified due to new lockdowns in China, lingering inflation and a strong dollar in the spotlight, well ahead of what is suspected to be a strong impression of the US CPI and potentially supportive of the USD.

Given China’s zero covid policy, a resurgence in China adds to worries about a global economic slowdown just as Europe is on the brink of a recession and will undoubtedly fall into one if Russian gas stops flowing. sink this month, triggering energy rationing.

The US dollar continues to strengthen and crude becomes more expensive; this should trigger greater global demand destruction as the dollar hit parity with the euro — $1 to the euro — for the first time in 20 years.

The American administration is taking two heads are better than one approach to solving the colossal problem of the price of oil in the world. President Biden is in the Middle East to pressure OPEC to bring in more barrels because he thinks they have more room to increase production. Janet Yellen is in Asia to support her Russian oil price cap,

And to complete the bearish carousel of oil market risk, Heathrow has asked airlines to stop selling seats to ease the chaos that has negative implications for oil.


Given concerns over European energy supplies, the risk of recession and a hesitant ECB, the overall situation for the single currency is bleak. Upside potential may be limited, but given that the pair started last week on a short-term 1.04 handle, there could be some short-term gains at some point. And yesterday’s profit-taking rally after printing .9999 was not totally unexpected. Still, the street will continue to sell out in rallies until word comes that Russian gas flow will resume via Nordstream 1.

Time zone analysis shows that most of the EUR selling over the past week took place almost entirely during the European session, likely following the capitulation of real money investors. Yesterday, Europe was better placed.