negative outlook

Outlook for the CNY is negative There will doubtless be more support measures coming in the days and weeks ahead. And in anticipation of these, markets may rally. But the underlying story on the economy is extremely disappointing right now, and that suggests that apart from periods of temporary stimulus-generated relief, we should anticipate markets remaining soft in net terms.    The CNY gapped higher ahead of the data today, and there is nothing in the numbers that suggests that this gap should be closed. Our recently revised CNY forecasts already look out of date. 7.20 could be reached in days. And though the authorities will be keen not to see the currency weaken in an uncontrolled fashion, they will surely regard a weaker CNY as one of the policy tools they will need to lean on to help the economy out of its current state of weakness.    We will be returning to those CNY forecasts shortly. The profile will undoubtedly be raised further, and the turn probably pushed out too.   Contribution to year-on-year retail sales growth

Prioritise quality companies. If an investor needs to take a defensive stance, it is worth turning to quality stocks, as their robust balance sheets and stable cash flows should insulate them from unforeseen downside risk. With this in mind, many of the largest technology and Internet stocks meet these criteria, while exposure to highly cyclical sectors and companies with excessive leverage should be kept to a minimum. Thus, in order to increase the resilience of your portfolios, you should focus on high quality companies, strong dividend payers and also not forget about regional diversification, as lower valuations and a weaker US dollar can also make global stock markets outside the US attractive.   The general understanding is that the market is likely to come out of the correction this year with expectations of a continued recovery in the second half of the year and a return to a bullish trend. This recovery is expected to help recoup portfolio losses from 2022.   However, there are several factors that pose risks to the market in the near future. These risks include the potential for a bear market, which could be triggered by inflation statistics such as the PCE index and strong labour market conditions. Another risk is the narrow scope of the current rally, where only some sectors have shown growth while others, including cyclical, defensive and growth sectors and assets such as bonds, have remained weak. There is also uncertainty about the timing and severity of a possible recession this year. The market is now looking at the likelihood of a moderate recession, which is already factored into current expectations and prices.   Once there is more clarity on these risk factors, portfolio allocation can be adjusted accordingly, considering both bonds and stocks, with a focus on the second half of the year and recovery of losses incurred in 2022. Two scenarios were considered for such an adjustment:   Scenario No. 1, the positive outlook, sees the market rising and breaking through significant resistance levels of 4200-4300 in the SPX index, which would lead to a rally. In this case, it would be prudent to increase long positions. Risky stocks should be held until they reach the most likely level of local recovery, and then locked in. For positions that still have potential, they should be held. The portfolio as a whole should then be rebalanced, creating a new balanced structure with a 25% allocation to cyclical assets, 35% to growth assets, 10% to protection and 30% to bonds.   Scenario #2, the negative outlook, assumes that the market continues to decline either from the current level or below 4100. In this scenario, protection should be strengthened by using inverse ETFs and reducing long positions (using stop losses) until the target stock is reached. This approach aims to minimise further drawdown until the correction is finally resolved in 2023.   The US stock market has thus experienced a strong recovery since the start of the new year, supported by a resilient technology sector, growth in the semiconductor industry due to AI development, a strong Q1 2023 reporting season, a pause in the Federal Reserve's rate hike, expectations of future rate cuts, lower inflation, a resilient economy, a smooth economic landing and a debt limit increase. While risks are still present, a focus on longer-term investment strategies can help investors benefit from the market's upward trajectory and continued recovery in 2H.  

Despite today’s positive surprise, we still expect industrial production to be negative for the year as a whole. Therefore, we believe that agriculture could remain the sole saviour of economic growth in 2023, as the latest industry data do not seem to indicate a turnaround in domestic demand. On a monthly basis, the volume of retail sales has been falling steadily since the end of last year, with March being the exception. The latest data from May confirm the downtrend as volume in retail shops fell by 0.8% MoM, adjusted for seasonal and calendar effects. The monthly drop reveals the fact that the pleasing improvement regarding the annualised index (-12.3%) is mainly due to base effects. Thus, there is little reason for joy as short-term dynamics do not point to a rebound in sales volume. Looking at the breakdown, only food sales performed relatively well in May, as sales increased by 0.1% MoM. From a trend perspective, however, this is not particularly good news, as it is only the third time in the last 12 months that food sales have risen, two of which were just 0.1% increases. Nevertheless, with annualised food inflation still at a very high level of 33.5%, it is understandable that households are still cutting back on food spending. Given that real wages have been falling steadily for eight months, we do not expect to see a significant recovery in food retailing in the second quarter, despite the easing of food price pressures.   Breakdown of retail sales (% YoY, wda)

Technical Market Outlook: The EUR/USD pair has broken above the short-term trend line resistance and is trading around the level of 1.0954 at the beginning of the new trading week. The intraday technical resistance is seen at the level of 1.0974, at the local high. The intraday technical support is seen at the level of 1.0935. Please notice, the momentum has hit the extremely overbought conditions again, so there is a confirmation of the bearish pressure on the lower time frame charts. In a case of a breakout lower, the next target for bears is seen at the level of 1.0901 and 1.0876. Only a sustained breakout below the moving average dynamic support around 1.0900 would change the outlook to more negative.    

The EURUSD slips into bearish consolidation zone ECB's Isabel Schnabel, who has been one of the most hawkish voices during the bank's latest monetary policy tightening campaign, started to sound dovish this week. Schnabel said that inflation is slowing at a 'remarkable' pace. The 10-year bund yield melted to 2.23% level – last seen back in June.   Yes, but Schnabel also said that officials 'have been surprised many times in both directions'. But traders are now set to sell the euro on dovish ECB expectations until inflation proves the contrary. The EURUSD slipped below 1.08 and to the 100-DMA, where it found some support. Following yesterday's selloff below the major 38.2% Fibonacci retracement, the pair is now in the bearish consolidation zone, with a strengthening bearish momentum that hints that the selloff could continue to 1.07/1.0730. Note that the market could absorb a further selloff at the current levels as the RSI is now at a mid-range: we are far from oversold conditions.   Gold sees support near the $2000 per ounce as falling US yields and fading appetite for equities continue to push capital into the precious metal.  Crude oil remains sold in a lower-highs-lower-lows pattern that paves the way for a further fall to the $70pb target, and China is not happy because Moody's cut its outlook for the Chinese sovereign bonds to negative warning that the country's usage of fiscal stimulus to support local governments and its spiraling property downturn pose risks to its economy. The Chinese CSI 300 fell to the lowest levels in almost 5 years, and nothing helps to undo the damage that government crackdowns and the COVID-zero policy have inflicted on investor confidence. China's stimulus measures brought Moody's to cut its sovereign debt outlook but couldn't bring investors or homebuyers back to the market.