Monthly Review: April 2023 - Soft Landing for the Economy?

Overview

Welcome to our look back at the previous month and a look ahead to what we might expect to see throughout May and beyond.

Yes, we are already one week into May but we had to wait to publish this blog.  The first week of May was a critical one with key Interest Rate decisions and Employment figures, which could determine the path of central banks for the rest of the year.

Both the US Federal Reserve and the European Central Bank raised their Interest Rates as expected but the Reserve Bank of Australia surprised the markets…read below.

US Equities

This time, let’s take a long-term view of the markets:

The charts below clearly show the NASDAQ, the S&P500, and the Dow Jones Industrial Average, starting their steady decline from around January 2022.  There are many reasons for this but the overriding reason was the fear of out-of-control inflation caused by the hangover from the global pandemic and the conflict between Russia and Ukraine.

History has shown us that the best way to tame inflation is for central banks to raise Interest Rates.  Corporations don’t like Interest Rate rises, therefore neither do investors who buy into equities.  Hence, the fall in the major indices.

Also, we have the elephant in the room about which central banks don’t like to talk.  History has shown us that the best way to fix rampant inflation is to completely break the economy and start over again.  This usually means fierce unemployment, global hardships, and rising sovereign debt.  This is the scenario that analysts and big banks have been predicting for months.

However, in our new reality, where economic theory seems to be revamped every year or so, are we able now to avoid the doom and gloom scenario?

The big banks seem to be softening their outlooks and the Central Banks are muttering under their breaths about a “soft landing” so, let’s see.  We still have fears of more bank failures which, to be honest, may be more investor fears than real management problems.

This would explain the better results with NASDAQ (which contains no financial entities) in the chart below:

However, the gains that we see in price action from the end of last year are forming a Rising Wedge which is often a reliable bearish pattern.

The S&P500 on the other hand has had similar success and we can debate whether price action is forming a Rising Wedge or an Ascending Triangle.  Each of these patterns is distinct but, if price action breaks through resistance at around 4180, we may see further gains.

On the Dow Jones Industrial Average, we see a Pennant forming.  This is where the resolution of the banking crisis will be super-important and we would like to see levels break above 34,000, and then 34,700.

The disturbing chart, however, is this one on the Russell 2000.  This index represents the small to mid-sized companies in the US economy and it is clearly in decline but with strong support at around 1720.

An interesting Fundamental event to watch will be the US GDP figures on 25 May.  Typically, with good GDP figures, small and mid-cap stocks will outperform their bigger siblings.  Be sure to follow the Valutrades Market Blast video on 22 May for more info on this.

Crude Oil 

Ah, we love our Fibonacci, don’t we?  WTI and Brent Crude had a price action gap early in April and we waited patiently for the gap to be filled on 26 April.

Price reached its peak for the month on 12 April at around $83 and then proceeded to creep down the giant Fibonacci staircase until it spiked downward last week back to the 100% retracement level.  This, apparently, was a flash crash in the middle of the night.  Some lucky computers had their buy orders filled at exactly $64 and the price recovered. 

Later that day, the buoyant US labour market hinted at higher demand and price action flew back up to its current price at $71.50 at the 61.8% Fibonacci level.

The Stochastic Oscillator is very overbought on the 4-hour chart so keep an eye on this and don’t forget to follow the Market Blast videos Mondays and Tuesdays.

CAD

Amongst the Interest rate decisions and the NFPs, the Canadian employment data last week was well above analysts’ expectations.  In fact, the Employment Change was double!

The Bank of Canada had been hinting at tapering and pausing Interest Rate rises but, with figures like these this seems unlikely and the Loonie has rallied.  Also, Friday’s big jump in the price of WTI had its usual positive effect on CAD. 

The next announcement on Canadian Interest Rates won’t occur until 7 June which will be followed on 9 June with the next set of Employment figures.

And, in case you were confused, this is why CAD is referred to as "Loonie":

AUD

Last week’s surprise Interest Rate rise by the Reserve Bank of Australia caught the markets off guard but gave us some great opportunities.

For example, AUDNZD was in a clear downtrend after hitting its high on 21 April.  The news drove price action back up and we could have traded the reverse on a number of indicators.

Looking at the same trade on the one-hour chart, we had even clearer signals from candlestick patterns and the overbought Stochastic Oscillator.  In fact, I invite you to check the same pair on the 30-minute and 15-minute charts to see the same setup.  This scenario is why we repeatedly encourage Valutraders to look for big moves, caused by fundamental events, that drive price action against the trend.  This gives us all great opportunities to enter the market WITH the trend.

Gold 

We spent most of April telling you that XAUUSD was consolidating and the chart shows price action in a ragged symmetrical pennant.

However, the turmoil from last week had us breaking out of the consolidation with Gold hitting a whopping $2,078.  At this moment in time, we would not recommend a direction on Gold as too much will be dependent on the US Federal Reserve and its monitoring of the data.  However, stay in touch with the Valutrades Market Blast Videos every Monday and Tuesday for more updates.

That’s all for now.  Make sure you subscribe to the Valutrades blogs and videos and we will see you here at the end of May.