And the EU crisis continues…

The ECB signaled rate hikes to everyone’s surprise last week, citing inflation from higher energy costs. If the energy crisis escalates on the back of increasing tensions between Ukraine and Russia, the central bank’s job to keep inflation at bay will undoubtedly become harder. The BoE announced another rate hike, but recent downward GDP forecasts put the bank at risk. Across the Atlantic, the Fed slid away from judgment when the nonfarm payrolls delivered last Friday. And they did exceptionally well, one might add. Can any economic data this week guide us to the following market movements?

ECB looks to Ukraine borders for policy

As unrelated as it may sound, tensions between Ukraine and Russia threaten not only the security of Europe but the ECB’s path to policy normalization. With energy prices skyrocketing and a retaliatory threat to cutting supplies being very realistic, Europe must quickly find alternative energy sources and stop relying too much on Russia. Regardless of how talks go this week, which is expected to be a critical time of negotiations in Russia and Ukraine on Macron’s visit and during EU’s meetings, Europe’s delays in sourcing energies might support the euro. Why? Energy prices impact how the bank decides on policy, and with prices increasing, ECB is somewhat justified to hike sooner and stop bond purchases sooner. However, this assumes no military escalation.

Euro broke its 100-day average last week amidst ECB’s hawkish stance and is on its way up to the 200-day average at $1.1585. In the short term, and provided talks go well this week, EURUSD seems poised to retest the 100-day average at $1.1385. It’s somewhat evident on Friday’s bar, as it closed an indecision day following a surge.

Apart from geopolitics, the EU will update its economic forecasts this week. This can also move markets in one direction, depending on whether there are upward or downward revisions.

Markets shift to US inflation, some earnings reports

Although the real risk of a full-blown war is minimal, not to say non-existent- at this stage, market participants’ flight to safety was evident last week. One would assume gold would be the asset of choice, but investors withdrew cash and deposited them into US bonds as they pay interest; gold doesn’t.

The move saw stocks weakening as several stocks have not performed as good as anticipated during this earnings season. Friday was not a good day for stocks either, as the NFP numbers boosted the Fed’s hawkish stance as added jobs beating estimates means growth might not decelerate as much as many feared. With this piece of data out the way, next up comes inflation; the US CPI is expected at 7.1%.

If inflation surprises to the upside, it’ll be a plus sign for markets to take more gains out of the stocks market and back into the dollar. If not, then stocks could continue to move higher. However, multiple earning reports in the names of Pfizer, Uber, Coca-Cola, to name a few, will be sure to add some volatility to the SPX.

Barely above its 100-day average, this will be a critical week for US stocks. 4500 is a strong level of support, but without closing above it for three consecutive days, the risk of failing bulls increases. It seems poor CPI data would let the SPX run-up to the 200-day at 4620 at least. With companies delivering, it’ll be hard to break the top, but a retest would be an initially good sign nevertheless.

Risk-off but OIL up

Despite risk appetite deteriorating, the oil market, and most energies one might add, has not only held well into recent gains but printed new multi-year highs at $92. Coupled with tensions in the EU, the cold weather in Texas has reduced some WTI production, giving commodity traders room for more upside.

This is now the seventh consecutive week of gains for black gold, and its drivers have been nothing that related to travel getting back online due to covid lockdowns easing up. On a different note, it seems that markets chose to ignore how much oil output is likely to affect prices as OPEC + estimates a surge in production. Or perhaps, they wait for earnings reports from oil companies to show the first signs of output increase. Upward revisions will likely put pressure on crude.

On Wednesday, the EIA goes live for yet another weekly report. If inventories contract, bullish conditions might improve. If not, they’ll be more susceptible to declining as they’re stretched upwards already.

Perhaps, whatever the EIA shows, markets are indeed sucking out the last bits of optimism given the rise in geopolitical opportunities, and prepare to start pricing in OPEC+’s forecasts. The 100-week average nears the 200-week one, which could have used technical implications for oil prices. The RSI is also at an overbought zone and shows divergence.

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