A further slowing in growth
The ongoing theme of mounting growth concerns against a backdrop of central bank tightening is continuing to drive market movements.
There has been comparatively little news flow overnight, but regardless equities have accelerated their declines into the start of this week . The ongoing theme of mounting growth concerns against a backdrop of central bank tightening is continuing to drive market movements. The S&P500 is down 3.5% to its lowest levels since March 2021, with the Nasdaq losing 4.3%. Price declines were broad-based across sectors, but led by the energy sector, which had been well supported the past few months alongside elevated oil prices. The hit to equity markets wasn’t confined to the US. The Euro Stoxx 50 lost 2.8% and the Nikkei was off 2.5%. Globally, the FTSE all world index fell 3.0%, its worst one day decline since June 2020. Oil prices were also lower, Brent oil down 6.4% to $105.21.
US yields had earlier moved higher and the curve steepened but have since fallen back sharply. The 10yr yield at one point was up around 6bps to reach a new cycle high of 3.20%. The 10yr yield back to around 3.04%, 10bp lower on the day. The 2yr yield is 13bp lower at 2.60%. That’s amid some pullback in Fed rate hike bets. 50bp is still fully priced for June, but now just under fully priced for July, with a futures implying a December rate of 2.68, down from 2.83 on Friday. German 10yr yields were 4bps lower.
Oil prices were lower, Brent -6.4% to $105.2 and WTI 6.7% lower. On top of the souring mood on the global demand outlook, Bloomberg reported that the EU will drop a proposed ban on its vessels transporting Russian oil to third countries. That is some softening at the margin, though the plan would still prohibit insuring those shipments. Russia reportedly said that it expects higher oil production in May is seeing new buyers for its crude, including in Asia.
In currency markets, commodity currencies underperformed amid lower energy prices and the risk off environment. The AUD was 1.8% lower, the worst performing G10 currency against the dollar bar the NOK. The AUD moved towards the 70c level during our morning yesterday, held around that level before moving further lower overnight, currently sitting at 0.6950, near its low for the day of 0.6945, the lowest the currency has been against the dollar since July 2020. The dollar was little changed on the DXY, with the euro and yen holding ground and eking out small gains.
Comments from the Atlanta Fed’s Bostic were in line with Powell’s that 75bp moves are not under active consideration. Bostic said “I don’t think we need to be moving even more aggressively. I think we can stay at this pace and this cadence and really see how the markets evolve.” He indicated that policy should get to neutral, and then reassess. “For me I am looking at somewhere between 2-2.5% as our neutral range. Then let’s wait and see what’s happening.”
The BoE’s Saunders continued to stake out ground on the hawkish side of the BoE. Arguing explicitly for front-loading, he suggested that “if monetary policy does not adequately lean against inflation pressures, then we may see a prolonged period of above-target inflation that causes longer-term inflation expectations to become further detached from the 2% inflation target” and “that could ultimately require a sharper adjustment in monetary policy ” Still, underscoring the contrast with the US, he noted that recent votes for 50bp “do not automatically imply that I would definitely vote for a 50bp hike”
Russia’s Victory day came and went with no major announcements. The Kremlin neither declared victory in Ukraine nor ordered a mass mobilisation as had been speculated. Putin did emphasise his claim that Russia’s attack on Ukraine was pre-emptive in response to an existential threat.
Data flow was quiet, the main release of note being Chinese goods trade, which softened further in April. Export growth in April in dollar terms slowed to 3.9% from a year earlier, compared to an increase in March of 14.7%. That’s the weakest pace since June 2020. Virus disruptions constraining output evidently weighing, but with some uncertainty about the role played by a slowdown in demand. Imports were broadly flat, with values boosted by higher energy prices. The RMB weakened, the USD rising 0.6% against CNH.
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