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Despite volatility being a bit muted, it was another topsy-turvy week for the financial markets as traders juggled debt ceiling issues, earnings results, and shifting central bank biases.

Equities and commodities were off to a bullish start, thanks to positive market sentiment spilling over from late last week, while bond yields were on edge ahead of the U.S. CPI release.

Before long, risk-off flows popped back when U.S. debt ceiling talks were postponed and the BOE joined the “dovish hike” bandwagon, leading market players to revisit recession concerns.

Downbeat inflation and trade data from China, along with yet another U.S. regional bank reporting a drop in deposits, contributed to a selloff in risk assets and a return in U.S. dollar strength.

Notable News & Economic Updates:

🟢 Broad Market Risk-on Arguments

Chinese equities extend rallies, buoyed by gains in the banking sector and residential gas supplier companies

BOJ minutes reveal that some policymakers are seeing “positive signs” of inflation falling back within the target range, suggesting a possible end to their easing cycle soon

U.S. CPI and PPI reports reflected slowing inflationary pressures, reinforcing expectations of a Fed pause within the year and possible rate cuts by 2024

U.S. initial jobless claims posted another weak read, keeping market players wary of a jobs slowdown in the coming months

🔴 Broad Market Risk-off Arguments

Fed Senior Loan Officer Survey reflected a modest deterioration in lending standards and tighter credit conditions but did not show major evidence of a credit crunch

Warren Buffet warns of U.S. growth slowdown and worsening U.S.-China relations, disclosing in an annual shareholder meeting that Berkshire Hathaway sold shares worth $13.3 billion in Q1

API and EIA reported surprise gains in crude oil stockpiles, reviving market demand concerns and risks from a potential “mild recession”

China reported slower exports growth of 8.5% year-over-year in April, down from an earlier 14.8% gain, and a 7.9% slump in imports versus the projected 0.2% decline

BOE hiked interest rates by 0.25% as expected while upgrading inflation estimates, but rhetoric suggested a higher bar for future tightening moves while monthly GDP highlighted stagflation risks

The U.S. debt ceiling impasse continues, despite Biden mentioning some progress in meeting with Congressional leaders, and talks for Friday were postponed to make more time for staff-level discussions

Earnings data turned out mixed: PayPal reported stronger than expected Q1 revenue and earnings, Airbnb shares slipped 12% on weaker Q2 revenue guidance, Disney earnings in line with estimates

PacWest Bancorp announced deposit losses in early May of roughly 9.5% and that it is exploring all strategic options

U.S. Preliminary consumer sentiment index for May: 57.7 (64.0 forecast) vs. 63.5 previous – University of Michigan

European Court of Auditors (ECA) said on Friday that ECB supervisors are too lenient with banks on how they manage credit risk

U.K. GDP for March: -0.3% m/m (+0.1% m/m forecast) vs. 0.0% m/m previous

Global Market Weekly Recap

Dollar, Gold, S&P 500, Oil, U.S. 10-yr Yield Overlay Chart by TV

Dollar, Gold, S&P 500, Oil, U.S. 10-yr Yield Overlay Chart by TV

Market players started the week off hungry for risk, as upbeat vibes from last Friday’s stronger-than-expected U.S. NFP report apparently carried over the weekend

Recession fears seem to have taken the back seat then, allowing crude oil and equities to rake in gains, led by another surge in Chinese stock indices.

However, markets resumed their holding pattern ahead of the highly anticipated U.S. CPI report on Wednesday, allowing safe-havens like gold to take advantage of the uncertainty. The precious metal managed to keep its head above the $2,000/ounce handle leading up to the inflation report, which was seen to make-or-break Fed rate hike chances.

Treasury yields also managed to extend their gains on Tuesday, albeit at a slower pace, as traders were likely still lightening up their short-term bond holdings while U.S. debt ceiling talks commenced between the U.S. President and Congressional leaders. Unfortunately, negotiations still ended in a stalemate, with Treasury Secretary Yellen warning that there are “no good options” other than Congress agreeing to lift the current $31.4 trillion limit.

As widely expected, Wednesday’s U.S. CPI release reflected slowing inflationary pressures, with the headline reading dipping from 5.0% to 4.9% year-over-year and reinforcing the possibility of a rate hike pause, likely triggering the sharp drop in U.S. bond yields after the event.

Meanwhile, crude oil remained range bound and unable to take advantage of risk-taking due to demand concerns stemming from a surprise gain in stockpiles.

Slowing Chinese inflation and trade activity, as well as a bearish turn in equity indices, ushered in risk-off flows around the middle of the week. Copper and silver were dragged sharply lower on weakening Chinese demand forecasts while gold gave in to a bit of profit-taking and emerging USD strength.

The safe-haven dollar was quick to take advantage of this change in sentiment on Thursday, despite more signs of an impasse in debt ceiling talks, softer producer prices, downbeat initial jobless claims data, and a return in banking sector troubles.

And we saw more of the same on Friday without a major catalyst / news event to shift the run into the U.S. dollar.

Almost every other major asset fell against the Greenback through the London and U.S. sessions on Friday, including government bonds, signaling global recession fears and the U.S. debt ceiling drama both remaining at the top of traders’ minds heading into the weekend.