Worst Market Rout In Two Years… And More To Come

I was saying yesterday that the optimism in the market wouldn’t last because this week’s retail sales data in the US wasn’t pointing at slowing inflation, and what Jerome Powell said in a conference this week wasn’t something that investors would normally like to hear. Powell said this week that the Federal Reserve (Fed) would go beyond what could be a neutral rate to tame inflation.

But at this point, no one knows where the neutral rate is, even the central bankers don’t have a clue.

Worst equity rout in almost two years

US equities recorded their worst daily drop in almost two years; the S&P 500 fell more than 4% lower yesterday, Nasdaq slumped almost 5%, and the Dow slid more than 3.5%. The main catalyzers behind the move are always the same: the worry of high inflation, tighter Fed to fight the sky-high inflation, and the fear of recession.

European futures hint at a negative start, following the US equity drama.

Inflation, dollar, and oil

The US dollar strengthened yesterday, as the risk selloff got traders to sell their positions and to sit on the cash.

Gold was better bid, but the gains remain timid compared to the size of the market rout. The price of an ounce didn’t exceed the $1825 mark and is already back to about $1815 per ounce this morning.

Bitcoin, however, has been resilient to the latest Nasdaq rout. The price of a coin remained relatively stable a touch below the $30K level. Yet, Bitcoin remains under the pressure of tightening financial conditions and is still vulnerable to a further selloff. However, the steadiness of Bitcoin, especially after the Luna Terra saga, has certainly given a stronger trust to the most famous cryptocurrency since last week. What didn’t kill it made it certainly stronger.

In traditional currencies, the Canadian dollar gained yesterday, after the data revealed that the Canadian inflation hit a three-decade high of 6.8%. The strong inflation data revived the Bank of Canada (BoC) hawks. The high energy prices are also supportive of the Loonie, in theory, but the dollar winds remain very strong for the Canadian dollar to make a significant positive move against the greenback on hawkish BoC expectations and the solid oil prices.

The EUR/USD is back below the 1.05 mark. The pound-dollar, on the other hand, couldn’t benefit from a fresh multi-decade high inflation print yesterday, which revealed that inflation in Britain topped at 9% in April. This week’s positive attempt remained capped below the 1.25 mark.

For the major currencies to recover at least some of their losses against the US dollar, the dollar must soften from its two-decade high levels. And for the dollar to soften from the two-decade high levels, the selloff on risk assets should slow. And for the selloff in risk assets to slow, the economic data must show a slowdown in consumer prices. And for that to happen, we must see softening in energy prices, and ideally an improvement in global supply chains.

Alas, the Chinese news don’t hint that the country is out of the COVID woods just yet, and oil prices don’t seem to be easing in a way we could hope to see the desired cooling impact on inflation.