Opening Bell: Markets Hold Their Breath Ahead Of U.S. Inflation Data

US futures were flat this morning, with European stocks mostly down. Traders braced themselves ahead of US inflation data, expected to reach a 4-decade high. If the numbers come in as feared, they should serve a blow to bulls hoping for peaking inflation. Bears would win the argument for further sharp Fed hikes, probably the final nail in the coffin for a euro parity with the US dollar.

Since the Fed pivoted hawkishly, the Nasdaq 100 and the Russell 2000 have been possessing a significantly positive correlation. As such, large techs and small caps have led the market's moves up and down this year, as they are highly susceptible to rising borrowing costs.

However, at the time of writing, the Nasdaq futures was outperforming, gaining 0.3%, while the Russell futures was up only a mere 0.1%.

European shares, by the way of STOXX 600, slid as much as 1%. However, if US inflation is the purported culprit, why would European shares be more affected? Fundamentally, Europe is facing an energy crisis, which helped push the euro to parity, and there may also be a technical cause (see chart below).

Notice that the S&P 500 Index (right) is above the support of its previous low, in contrast to the STOXX (left), below it. As a disclaimer, I also compared the S&P 500 Index's price level on May 9th. It is below that. However, its low is what makes the impact. So, in addition to the chart reflecting fundamentals, it also creates its power, as chart followers respond to what they visually see on the chart.

But the momentary picture doesn't mean US stocks are out of the water or US investors aren't concerned.

If we want to see what institutions think, let's turn to Treasuries.

The most followed US bonds are 10-year Treasuries, which are down for the third day, demonstrating that investors are entrenching themselves behind the safety of US debt.

However, there is a stronger signal of distress.

Note, not only has the yield curve remained inverted, but it indeed deepened the pattern, as the 10-year yield digs deeper, providing its holder an even lesser year than that of the 2-year note, a market anomaly and therefore a leading strengthening indicator to a recession.

The dollar was volatile and was little changed, keeping its highest levels since Oct 2002.

The fear that a higher inflation read will keep propping the dollar will further weigh on equities. A stronger dollar turns stocks more expensive, not because investors meant to bid them higher, but because the value of each dollar is suddenly worth more, which moves investors to reprice stocks lower, which naturally entails selling the stocks.

Furthermore, higher rates increase borrowing costs for investors to prop up the stocks and the companies who borrow to expand their businesses. Finally, the inverted yield demonstrates that investors are willing to buy lesser-paying bonds because they are afraid to leave their money elsewhere.

These circumstances create a confluence of headwinds for the stock market.

The dollar is developing a High Wave candle (on an intraday basis) for the second day in a row, which means investors are second-guessing its direction.

After a significant breakout of either a massive H&S Continuation pattern or Symmetrical Triangle, it's natural for the dollar to fall before it continues higher.

Gold was flat after a two-day decline.

After a 5% drop, gold is finding support as it nears the Falling Channel bottom and the Aug 2021 lows.

Bitcoin pared most of yesterday's losses and is attempting to climb back above the critical $20K level. If it fails, it could resume its bearish Rising Flag pattern, which implies a target price of about $6k. (Here is my long-term view.)

Trading at $97 a barrel, oil struggles to reclaim the $100. WTI plummeted 8.5% on Tuesday as recession fears following aggressive rate hikes will kill demand, so much so that it overshadowed a tight physical oil market, which any other time would send the black gold in the opposite direction. Now, let's look at the technicals because they're a doozie.

Precisely one week ago, I warned that a Rising Flag suggests oil will fall lower. In the same post, I forecast that if the flag's implied target follows through, it will complete an even larger bearish pattern, a reversal triangle. The fall below $100 accomplished that, setting us to a $60 target.

Up Ahead

• Earnings due from JPMorgan (NYSE:JPM), Morgan Stanley (NYSE:MS), Citigroup (NYSE:C), Wells Fargo (NYSE:WFC)
• US CPI data, Wednesday
• Federal Reserve Beige Book, Wednesday

Disclaimer: The author currently does not own any of the securities mentioned in this article.