Overnight Headlines

*Global stocks rebound as investors reassess rout

*War-driven inflation, threats to growth likely to vex ECB

*Euro holds gains overnight as markets cheers Ukraine talks

*Oil’s wild week continues as prices fluctuate after huge slump

US equities rebounded strongly with the benchmark S&P500 climbing 2.6%. This was its best session since June 2020. The Nasdaq jumped 3.6% for its biggest one-day gain since November 2020. These moves follow on from a huge move in Europe where the Dax had closed nearly 8% higher. Energy was the only sector lower. Oversold banks gained, along with some growth sectors. Asian markets are bouncing. Futures are modestly in the red.   

USD declined and failed to hold most of its recent upside break. DXY dropped back to 98, after hitting 99.41 on Monday. EURUSD rocketed higher, closing at 1.1075. This was its largest one-day gain since June 2016. GBP’s advance took its above support/resistance at 1.13160. USD/JPY looks to be breaking out of its ascending triangle and targets 116.35. AUD recovered some of its losses and trades above its 200-day SMA at 0.7314. CAD fell from Tuesday’s swing high at 1.2901.

Market Thoughts – Extreme volatility screams “dead cat bounce”?

Markets have latched on to a couple of developments as an excuse to rally very hard. These events include today’s meeting between Russian and Ukrainian officials and the suggestion oil-producing nations might raise output. Europe is also set to hold an emergency summit to discuss a new growth and investment model.

For good measure, Brent crude suffered its fifth-steepest fall since the futures contract has existed in its current form. The Dax move was one for the ages. But frantic adjustment and short covering probably explain some of the unprecedent moves. And previous rallies on this scale in stocks didn’t signal a turning point.

A “dead cat bounce” is a correction after an extreme move. But big rebounds are inevitable during times of high uncertainty and volatility. The opposite was obviously the case in the oil market. Interestingly, Saudi Arabia, the de facto leader of OPEC+ made no official comment. It has been reluctant so far to raise output.

Chart of the Day – EUR/USD rally into cautious ECB, blockbuster US CPI

The ECB meet later today. It is the first major central bank to pronounce on policy since Russia’s offensive. The current trade-off between growth and inflation puts President Lagarde in a tough spot. A period of “slowflation” should keep the bank from hiking rates before later this year at the earliest. A neutral policy calibration and a possible end date for its bond buying programme would be a lot less dovish than many are predicting.

The world’s most popular currency pair remains a bellwether for risk sentiment and trend in commodity markets. US CPI near 8% will also provide more volatility for the major. Yesterday’s rally took prices back up to its breakdown level around 1.11. Oversold conditions have eased considerably. But buyers still need to consolidate recent gains, preferable above 1.11/1.1121. The November trough at 1.1186 would turn the tide, though the long-term bear trend is strong.