Looking for safety and yield sparks a broad risk aversion mood in markets

Due to concerns over slowing global economic growth and rising interest rates, investors searched for safety and yield on Monday, pushing the dollar index above 104.

Investors are unsure on many counts because of a rise in inflation, the war in Ukraine, and tighter lockdowns against COVID-19 in Beijing and Shanghai, but they are sure that the United States interest rates will rise and the dollar will follow.

China's zero-Covid policy is already impacting economic output in Shanghai and port activity, as container ships remain off the Chinese coast awaiting unloading. There seems even less chance of supply chain concerns easing than a few months ago.

The China trade data for April released on Monday only serves to amplify that point. Imports declined 0.1% in March and remained unchanged in April, which was slightly better than expectations. Transport difficulties and port stoppages impacted the flow of goods and services, resulting in a 3.9% decline from 14.7% in exports.

The dollar rose to a 22-month high against the growth-sensitive New Zealand dollar and a three-month high against the Australian dollar as Asian stock markets slipped.

Energy prices

Risk-off sentiment and China's lockdowns also affect oil prices. Oil prices remained steady on Monday morning, despite Asian stock markets falling. Investors are watching Russian embargo talks that will tighten global oil supplies. Tomorrow, the leaders may meet to conclude the negotiations. The G7 nations announced Sunday their intention to ban or reduce Russian oil imports, and Washington imposed new sanctions on Gazprombank executives. On Sunday, Japanese Prime Minister Fumio Kishida said that Japan, one of G7's top five crude importers, will ban Russian crude imports "in principle." 

The prospect of the Russian oil ban boosted US crude prices by about 5% last week, while Brent rose almost 4% on concerns over global economic growth offset by tighter supply. Fundamentally, oil is bullish in the short term, and only fears of an economic slowdown in the future are holding it back.

US inflation data

The April CPI figures will show if the inflation surge has peaked after the fastest increase in over 40 years. Gasoline prices hit record highs in March, pushing the annual inflation rate up to 8.5%. The Fed is forecasting a yearly rate of 8.1%. Still, a greater reading than expected could set the stage for even more aggressive monetary policy tightening. Fed's aggressive tightening has investors afraid the economy could tip into a recession.

The week ahead will also feature several speeches from Fed policymakers.

Eurozone, UK data

This week, ZEW sentiment indicators from Germany and preliminary UK GDP data for the first quarter will shed light on the dilemma in which central banks find themselves. This is because they grapple with soaring prices and concerns about growth.

It is expected that the ZEW index will continue to drop in April from the lowest level since the pandemic began in 2020.

The UK economy is expected to expand by 1% in the first quarter.