With intensifying tensions in Ukraine, rising Covid cases in China, mounting tensions between the US and China, a selloff in US and international treasuries, the steady rise of the US dollar, and a decline in safe haven currencies, risk sentiment is gloomy this week.
A rare occurrence of bad news
It’s unusual to have such a sour combination of negative news on the wire.
First, the week began with photos of Russian bombs raining on Ukrainian cities in the aftermath of the bridge explosion that connected Russia to Crimea. That suggests the fight will be escalated more before winter. And it’s very awful news.
Second, Covid cases in China reached their highest level in two months, fueling fears that major cities like Shanghai or Shenzhen will face lockdowns, just as the government ramps up efforts to contain contagion ahead of the twice-a-decade Communist Party gathering, where Xi Jinping will almost certainly be re-elected.
Third, tensions between the United States and China are rising. Joe Biden’s recent decision to severely restrict chip shipments to China did not sit well with Chinese officials or semiconductor investors. Nvidia suffered another 3% knock Wednesday, falling below $120 per share for the first time since March 2021. AMD dropped another 1%. Furthermore, the worldwide market value of US semiconductors fell by $240 billion. The decline in semiconductor stocks has also impacted the currency markets. And the currencies of chip exporting countries like as Korea and Taiwan plummeted.
However, everything fell in relation to the US dollar.
…including currencies and assets that would ordinarily have served as safe havens, particularly in the face of escalating global tensions and violence.
The Swiss franc fell against the US dollar, while the USDCHF surged over parity. The Japanese yen resumed its historic decline, with the dollar yen rising to 145.80.
Gold declined for the fifth consecutive day to $1660 per ounce, and is expected to fall further around $1600 as US rates and the currency continue to increase.
And, despite a handful of less hawkish statements from Fed members at the start of the week, US rates continue to rise on the strength of hawkish Federal Reserve (Fed) pricing. Chicago Fed President Charles Evans stated that he wants to get to a position rapidly where policymakers can feel comfortable stopping to lessen the danger of overshooting. The Fed Vice Chair, Lael Brainard, too sounded cautious, stating that prior rate rises are still having an effect on the economy.
However, investors overlooked the most recent remarks. The US 2-year rate rose to 4.35%, with Fed funds futures pricing a 77.5% likelihood of a 75bp raise at the next FOMC meeting. This is higher than yesterday.
And the upward pressure on US rates is far from over, as large US bond purchasers abandon the market. Foreign central banks are exiting investments in order to mitigate the impact of US tightening on their reserves, while Japanese pension funds and life insurance are apparently selling US treasuries because they no longer guarantee safety and security to their holders. The Fed’s balance sheet has begun to shrink, but we are still at historically high levels – by far – and it’s difficult to envision the Fed stopping decreasing its balance sheet, especially since inflation is nowhere near where Fed policymakers desire it to be.
At the very least, yesterday’s deluge of negative worldwide news was successful in driving down oil prices. After flirting with $94 a barrel on Monday, the price of a barrel of American oil fell to $90 Tuesday morning.
US earnings – how bad doctor?
The US earnings season begins in a bleak and dismal climate. According to FactSet statistics, the S&P500 businesses’ EPS growth might slow to less than 10% in the third quarter. Analysts have reduced their profit predictions by around $34 billion. And if that’s the case, the S&P500 will have its worst quarter since the third quarter of 2020, when markets were battered by the pandemic but had the Fed on their side. Even the Fed is no longer available to assist.
Hardly saying the day
The Bank of England (BoE) began the week by announcing more steps to assist the UK bond market. They will acquire additional bonds over the next five days to make up for the massive fiscal spending that Liz Truss threw at the market and that the market refused to support. The Bank of England will also introduce a longer-term facility to relieve liquidity constraints.
It’s also ‘funny’ that, after scrapping tax cuts for the UK’s highest incomes, the Chancellor of the Exchequer said that he will unveil his medium-term fiscal policy and economic predictions by the end of the month, three weeks sooner than previously anticipated. I’m not sure if investors are excited about it.
The Truss administration had a horrible first year in office, and things are becoming worse by the day. Unfortunately, the additional steps revealed yesterday did not sway investors. The British 10-year gilt yield increased by more than 4.50%, while Cable remained at 1.10, with the likelihood of additional easing looming.