Inflation data from the US leads to market concerns about the euro
In spite of this, we believe that core inflation still remains strong and real policy rates remain deeply negative, so 50bps rate increases will still be justified after summer.
A slipping stock market and a hovering euro against the dollar awaited inflation data from the United States to see if the Federal Reserve will hike interest rates this month again.
Europe’s stocks slumped again because of recession worries after South Korea and New Zealand hiked interest rates again in the Asia Pacific.
In addition to a 1.2% jump in gas prices, the FTSE in London, the DAX in Germany, and the CAC40 in France all fell 0.6-0.8%.
Since April, copper has fallen 30% in price, which is also an indicator of global growth, at a 20-month low, despite Wall Street futures pointing higher, although copper prices were at a 20-month low too.
While UK economic growth rose unexpectedly, investors were more focused on whether U.S. inflation would rise to 9%, a record level since 1981, in the coming weeks.
Kit Juckes of Societe Generale explained that the higher the U.S. inflation numbers, the clearer it will be that the Fed will hike rates later this year. “Markets have been held up a bit in terms of parity but there are still an incredible number of moving parts,” Juckes said.
At its last meeting, it increased them by 75 basis points, the first time since 1994 that it has done this.
In two days, if inflation rises to the highest level in six months, the bond market could become nervous again, inverting the U.S. yield curve and sending the euro through parity decisively,” Juckes said.
Inflation data from the US leads to market concerns about the euro
The South Korean central bank raised its interest rates by 50 basis points at the meeting of its monetary policy committee on Wednesday, the largest increase since the bank enacted its current policy system in 1999, and the New Zealand central bank raised its rates by 50 basis points for the third consecutive meeting.
It left fixed income markets all waiting for the U.S. inflation data at 1230 GMT. German government bond yields edged up to 1.15%, after falling sharply for two days, while 10-year U.S. Treasuries hovered at 2.97% as they also digested the IMF’s latest U.S. growth forecast cut.
Jim Reid, senior vice president at Deutsche Bank, said that there are now signs that the bond market is in recession, “with growing alarm”. I would like to draw your attention to the two-year/10-year U.S. Treasury curve, which has inverted before every one of the last 10 U.S. recessions and remains near its most inverted of this cycle so far at -8.5 bps.
As of Tuesday evening, Wall Street futures were indicating that the main indexes of the S&P 500, Nasdaq, and Dow Jones would start marginally higher after a late slump the previous day.
Despite two straight days of losses, MSCI’s broadest index of shares outside Japan in Asia-Pacific gained 0.5% overnight, snapping a string of two straight declines. The index had dropped to its lowest level in two years the day before.
Taiwan’s finance ministry announced Tuesday evening that it had activated its stock stabilization fund, leading to gains in Taiwanese stocks. A 19-month low had been reached in the market that day.
Despite losing nearly 2% the previous day, Japan’s Nikkei finished up 0.5%.
Oil prices fell sharply in July, suggesting that June’s (inflation) may have been a peak. According to ANZ analysts, the most dynamic phase of Fed tightening could conclude on 27 July with a 75bps rate increase.
After the summer, we expect 50bps rate rises will still be appropriate given underlying core inflation strength and deeply negative real policy rates.”
The 20% slump in world stocks this year, as well as the surge in the safe-haven dollar, have been attributed to fears that higher rates could cripple the global economy.
As investors waited to see if the euro would hit $1.0050 for the first time since 2002, the euro has lost over 11% since January.
Tuesday, it fell as low as $1.00005, just a whisker away.
In contrast to major rivals, the dollar also held steady against other peers.
There was a pause in oil price declines overnight. It was little changed at $100 per barrel for Brent crude and $96.31 for NYMEX West Texas Intermediate crude. A tonne of copper slipped to $7,310 on the London Metal Exchange (LME) after slipping as low as $7,202.50 earlier in the day.
At $19,772, bitcoin was still below the crucial psychological $20,000 mark, but over 2% higher and on track to snap a three-day losing streak.
There is a shift in the dollar and euro after consumer prices surge, with the dollar jumping and the euro breaking parity
There was a surge in the dollar against a basket of currencies on Wednesday and a break below parity between the dollar and the euro after data showed that the consumer price index in the United States surged to a 41-1/2 year high in June.
At the opening bell, the markets hold their breath before the release of the U.S. inflation data for the week ahead
The US futures market was flat this morning, while European stocks were mostly down as well. There was a lot of anticipation among traders ahead of the release of US inflation data, which is expected to reach a four-decade high.
The results will serve as a blow to bulls who were hoping for a peak in inflation in the near future if they come in as expected. Those who would argue for further sharp Fed hikes would probably win the argument, and that would probably be the final nail in the coffin as far as a Euro-US dollar parity is concerned.
There has been a significant positive correlation between the Nasdaq 100 Index and the Russell 2000 Index since the Federal Reserve pivoted hawkishly in December.
Since the market has moved up and down this year, the market’s movements have been primarily driven by large techs and small caps, since they are highly susceptible to increased borrowing costs.
Nevertheless, the Nasdaq futures at the time of writing outperformed the Russell futures. This was due to a gain of 0.3% compared with a mere 0.1% gain for the Russell futures at the time of writing.
By way of STOXX 600, European shares slid as much as 1%. yet, if US inflation is the purported culprit, why should European shares be more negatively affected?
mentally, Europe is facing an energy crisis, which helped push the euro to parity, and there may also be a technical cause.
In contrast to the STOXX (left), the S&P 500 Index (right) is above the resistance of its previous low, which is in stark contrast to the S&P 500 Index (right) being below it.
I would like to point out that I also compared the S&P 500 Index’s price level on May 9th in the interest of full disclosure. As you can see, it is below that.
The low level of its impact, however, is what makes a significant difference. Furthermore, as well as displaying fundamentals, charts also have power, because they are able to capture the attention of readers, as they react to what is visually displayed on them.
It is important to realize that this momentary situation does not indicate that US stocks are done for or that US investors do not have concerns.
Ten-year Treasuries have experienced more declines for the third straight day, demonstrating investors’ confidence in US debt’s safety.
This is a leading indicator of a recession because not only has the yield curve remained inverted, but also a deeper inversion of the yield curve is taking place, making the 10-year note yield even lower than the 2-year bond. This is a market anomaly and therefore an indication of an upcoming recession.
Despite the volatility of the dollar, the rate was little changed, staying at its highest level since October 2002.
Equities will be further weighed down by the fear that higher inflation readings will keep the dollar propped up for a prolonged period of time. Stocks become more expensive when the dollar gains strength, not because investors intended to bid them higher, but because the value of each dollar is suddenly worth more, which moves investors to reprice stocks lower, which in turn means investors have to sell the stocks.
A higher rate of interest also increases borrowing costs for investors who borrow to prop up stocks and businesses that borrow to expand. In conclusion, the inverted yield indicates that investors are willing to purchase bonds with lower returns due to their fear of losing their money elsewhere.
Disclaimer: This article’s author has no current ownership interest in any of the mentioned securities.