Daily Brief

Markets wobble on

But the selling stops overnight

This week has started in the same vein as last week finished , with a broad-based risk averse market, full of nerves, jitters and big declines. Equities took another bath through yesterday as bond yields rose, commodities felt the pinch and the greenback carried on marching onwards, if not quite upwards throughout the day. A mild and much-needed correction arrives overnight.

Weaker Chinese trade data          

The latest bout of risk aversion took its cue, in part, from a weak looking set of Chinese trade data. Whilst imports may have increased by 7% (MoM/Apr), that still represents a near 5% YoY decline for the first four months of the year. Export growth slowed swiftly last month too, with the 3.9% (YoY) increase during April representing the slowest pace of growth in China since the beginning of COVID.

Those latest lockdowns in China will have played their part in restricting manufacturing through the month, but the chances of China reaching its goal of 5.5% GDP growth for this year, are diminishing fairly rapidly. Understandably, commodity prices led the sell-off, and both the Aussie and Kiwi underperformed on the news. NZD/USD promptly slipped to its lowest point since June 2020, down at 0.6330. AUD/USD is struggling to hold above 0.7000.

Sometimes no news is bad news

In truth, there was little ‘new’ news elsewhere for markets to build a fresh bear case from yesterday. The juicy bits of data don’t start hitting the wires until tomorrow, as markets get hit with a slew of inflation data from around the world including; China, Germany and the big one from the U.S. But sometimes, no news is bad news, especially at the moment, so the waves of selling persisted.

Did currencies not get the memo?

Where there was a modicum of change, was amongst the major currency pairs. Having forced its way back up to 104.00, the dollar found the going tough, and the dollar index (DXY) retreated back toward 103.50. EUR/USD, which accounts for the bulk of the DXY, has been defending 1.0500 with aplomb over the past few days, and rallied back over 1.0550, leading the charge against that resurgent dollar.

GBP/USD initially dropped to a cycle low of 1.2260, but the pair witnessed a dramatic turnaround too, rallying over 140pips to 1.2400, before settling back around the 1.2350 mark. The speed of the rally would imply that there was a stop-loss driven squeeze of those market-dominating sterling shorts. Elsewhere, USD/JPY is also showing signs of fatigue above 130.00.

Bostic’s glued-on for 50bps

The Fed’s Bostic followed-on from Powell’s comments last week, by seemingly ruling out a 75bps rate hike from the Fed over the coming months, during an interview yesterday. Commenting on the 50bps hike last week, he suggested that it was already ‘a pretty aggressive move, and I don’t think that we need to be moving even more aggressively’. He also mentioned that he feels that the Fed can maintain hikes at the current 50bps pace ‘maybe two, maybe three times, and see how the economy responds.’ As we commented yesterday, tomorrow’s inflation data is key for both the Fed and markets. A much-needed dip in inflation is currently forecast, which could take some pressure off, even if only temporarily and would help solidify the case for the current pace of hikes.

What else is happening today?

The Fed’s Williams, Wallace and Mester will be giving speeches during the day. Let’s see if they maintain the recent 50bps mantra. The latest German ZEW survey is set for release this morning, and a mild correction is forecast.


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