The post-FOMC rally ran in equities out of steam within 24 hours with Wall Street plummeting yesterday once again. Even the most ardent FOMO gnome had a conviction crisis as a swath of central banks followed the Fed’s lead and hiked policy rates. Taiwan hiked 12.50 bps, the Bank of England hiked 25 bps and the Swiss National Bank shocked markets, hiking policy rates by 50 bps.
It was probably the SNB that broke the camel's back because if the Swiss are worried about inflation, we all should be. Stock markets went looking for ABE (anything but stocks), and it looks like a US 10-year yield approaching 3.50% was just too tempting. US bonds saw some impressive ranges and as money poured into the US curve, the 10-year fell from near 3.50% to close around 3.25%.
That set of a negative feedback loop in the US dollar which suffered heavy losses yesterday. They were led by a post-SNB rally by the Swiss franc, which spilt over into euro and Sterling strength as well, helped along by the BOE hike. EUR/USD rallied by 1.0% and probably would have had an even better day if EUR/CHF wasn’t getting simultaneously crushed. Falling US yields also eroded US Dollar strength as did a huge rally of the Japanese yen.
With hiking policy rates this season's new black for the world’s central banks, offshore markets moved to rapidly price in that the Bank of Japan would raise the 0.25% yield cap on 10-year JGBs at today's policy meeting. USD/JPY fell by just over 1.0% yesterday helped along by falling US yields as well. Japanese markets are having none of it though, with USD/JPY rising by 0.80% already today to 133.25.
Gold also rallied yesterday, but that was because the US Dollar fell, with the inverse correlation as strong as ever. The Yen gains yesterday boosted Asian currencies although the KRW, THB, TWD, and CNH are moving lower with the Yen as well. Oil held steady yesterday despite probing the downside, no amount of noise elsewhere changes the fact the world doesn’t have enough of it or that refineries can’t refine enough of it. The underachiever was the crypto space. Bitcoin ran into buyers again ahead of $20,000.00 yesterday but remains uncomfortably close to the danger zone at $20.700.00. The weekend session promises to be emotional.
My overall take on the state of play for markets at the moment is that even the most ardent buy-the-dipper in the equity space is starting to realise inflation is a threat, with central bank banks prepared to hike the world into a slowdown and possible recession to get on top of it. A recession isn’t good news for pimped-up valuations either. The street is looking for anything but equities into the end of the week, and tasty government bond yields seem to be the preferred home.
In other data recently, US Housing Starts and Building Permits in May slumped from April. We can draw a line straight to rocketing mortgage rates on that one and the US won’t be the last to feel housing market pain. Singapore Non-Oil Exports (NODX), surprised to the upside, rising by 12.40% YoY in May, boosted by electronics. That will be a welcome offset for slowing domestic consumption but unless China really reopens, will start to fade in the coming months.
We have Eurozone Inflation today and US Industrial Production and Manufacturing today. Federal Reserve Chairman Jerome Powell is also speaking at 2045 SGT. And apart from testing every resident of Shanghai for Covid-19 this weekend, China releases its 1-year and 5-year Loan Prime Rates on Monday. Cryptos may generate some headlines this weekend as well if Bitcoin breaks $20,000.00.
Finally, there are apparently $3.40 trillion of options expiries on listed US equity markets today where liquidity may be reduced ahead of a US holiday on Monday. That may distort price action on Wall Street today. Today’s session could be a good one to avoid.