The first months of 2022 went as expected in the best trading opportunities of the first quarter of 2022: the US S&P 500 outperformed the US Nasdaq 100; EUR/USD rates fell below 1.1000; and the US Treasury yield curve (2s10s) has moved into inversion territory. While one of the main catalysts – Russia’s invasion of Ukraine and the ensuing calamity in commodity markets – was not on our proverbial bingo card, the other drivers of the action prices were: central banks beginning to aggressively raise interest rates; and the end of the fiscal stimulus.

It stands to reason that the main drivers of price action in 1Q’22 will remain in place for the duration of 2Q’22. The Federal Reserve is becoming more aggressive on raising interest rates, joining the chorus of many other major central banks in rolling back monetary easing. Governments are “put to work” when it comes to further tax stimulus. The COVID-19 pandemic continues to wane, although lockdowns appear sporadically (e.g. in China). Even if Russia ends its war against Ukraine, the impact on supply chains will still be felt for several months. Looking to 2Q’22, these factors suggest greater volatility ahead, as do concerns over deteriorating economic growth in developed economies. Risk appetite will fluctuate before settling into a more bullish state later in the year.

US S&P 500 versus US Nasdaq 100 (ETF: SPY/QQQ; Futures ES1!/NQ1!) TECHNICAL ANALYSIS: DAILY CHART (Mar 2020 to Mar 2022)

Source: Trading View

When the best Q1 22 opportunities were written, the S&P 500/Nasdaq 100 ratio (as measured by SPY/QQQ) stood at 1.19, and a rise to 1.29 was expected at the start of the year. . The ratio reached a high of 1.31 before peaking, and was in a stable state of retracement at the dawn of 2Q’22. The potential double bottom that formed against the 1Q’21 and 4Q’21 lows remains valid, however, suggesting that the stock rotation from growth to value is still in early innings. The long S&P 500/short Nasdaq 100 trade is still preferred; looking to get closer to 1.22 with a rally to 1.35 in the coming months.

US 10-year yield minus 2-year yield (2s10s) TECHNICAL ANALYSIS: DAILY CHART (March 2020 to March 2022)

Source: Trading View

The logic behind expecting an inversion of the US Treasury yield curve is simple: while the short end of the US Treasury yield curve tends to see higher rates when the Fed pulls its stimulus measures, the long end of the yield curve tends to fall as growth and inflation expectations – inherently long-term – decline as the reduction in stimulus reduces economic potential .

Still, further flattening of the US yield curve is expected in the 2s10 range, which will heighten recession fears for late 2022/early 2023. However, yield curve inversions have tends not to last very long, so this outlook has a limited shelf life (also, after yield curves invert stocks tend to bottom).

EUR/USD TECHNICAL ANALYSIS: DAILY CHART (March 2020 to March 2022)

Source: Trading View

We continue to believe that the juxtaposition between the Federal Reserve and the European Central Bank will only grow in the coming months, and historically speaking, the gap between inflation rates in the United States and the eurozone suggests a further weakening of the EUR/USD exchange. rate. Yes, the ECB may raise rates later this year, but by then the Fed may already have raised rates by 100 to 150 basis points. A return to the 1Q’22 low at 1.0806 is expected at the beginning of 2Q’22, followed by a return of EUR/USD rates to the 2020 low at 1.0636 shortly after (coinciding with the movement of the DXY Index above 101.00 before peaking).