Analysis of the Global Macroeconomic Environment
Wednesday's US equity market performance was poorer, with the S&P 500 down 1.0 percent. US 2s10s steepened more, with 10-year rates rising 5 basis points to 2.6 percent, their highest level in three years, and 2-year yields falling 5 basis points to 2.47 percent. Oil prices declined by 4.7 percent.
I will not dwell on the minutes of the FED, as Vice-Chairperson-to-be Brainard has already set the table.
Following a reprieve in March, the global bond market has resumed its sell-off, resulting in a deterioration in cross-asset risk sentiment, with global technology equities suffering the brunt of the follow-through.
Reducing the balance sheet in a high-inflation environment creates enormous uncertainty for markets. However, despite the accumulation of macroeconomic and geopolitical headwinds over the last few weeks, equity markets were excessively high, and this is essentially a corrective move to a more rational level.
The primary issue appears to be rates, which could result in a systematic bid return if rates manage to stabilize. However, if rate volatility continues to be excessive, equities may remain under pressure.
The overnight surge in US transport equities is the latest in a long line of smoke signals the market is sending regarding recession fears. While no market economist advocates for a recession with excessive economic momentum, this does not mean that some of its precursors cannot begin to manifest.
The big picture has shifted from a definitive mid-cycle environment a month ago to a late-cycle probability now. Since Covid's inception, I've been harping on the compressed nature of market cycles, and the most recent adjustment took weeks rather than a year the prior time. Another illustration of the ticker tape's brutality and the rapidity with which key pivots are priced.
The point is that, similar to the 2's10's inversion, while we can debate the likelihood of a recession and if the Transports move is a precursor to one, the viciousness of pricing actions has compelled action regardless of whether one believes in them.
One swallow does not make a spring; nonetheless, this is beginning to feel like a market concerned that the Fed is falling behind the curve, and that something along the lines of the Volcker adjustment is on the horizon.
Fundamental Analysis of Oil
Overnight, negative factors aligned as oil prices fell to a three-week low. The current oil price collapse was exacerbated by a shocking bearish-to-consensus build in US stockpiles, an IEA reserve release, Covid concerns in China, and a strong US dollar amid global recession fears.
The strong USD is the result of a hawkish Fed attempting to contain inflation by raising interest rates in order to slow the US economy. In principle, this should have a marginal effect on oil prices.
Along with the massive release of global reserves, demand destruction and recession are currently the primary mechanisms for lowering prices in a world bereft of inventory buffers. Overnight, with recessionary smoke signals dotting the horizon, some people checked one or both of those boxes.
China's omicron outbreak is growing at a considerably faster rate than past viral strains, and officials, unwilling to abandon their current policy, are continuing to attempt to contain breakouts through rigorous controls. As a result, oil traders continue to reduce their expectations for mainland demand.
Additionally, oil is being harmed by reports. Despite evidence of possible war crimes committed by President Vladimir Putin's forces in Ukraine, the European Union will not restrict Russian oil imports for the time being and will instead focus on the far easier task of eliminating less valued coal.
Today, the psychological and technical support for Brent Crude (CO1) $100 may become clear.
Fundamental Analysis of the FOREX Markets
Fed Governor Brainard's Tuesday statement, in which she acknowledged the possibility of a "rapid" balance sheet run-off, sparked a broad USD gain.
EUR/USD pushed below the critical 1.0940/50 pivot, while USDJPY broke over 123.00/20. Given the current situation of interest rates in the United States as a result of the Fed's hawkishness, the US dollar is more likely to consolidate than to correct lower from current levels.
If you focus exclusively on equities, you might believe we've returned to the 'policy mistake' trade. We are not witnessing the flattening/reversal surge in the Eurodollar that would accompany that move. Rather than that, back-end Eurodollars are under pressure, and 5s30s have risen considerably. Due to the reaction of the fixed-income markets, this US dollar rise has become even more entrenched.
Increased US yields are very much to the greenback's favor.
Fundamental Analysis of the EUR/USD
On the other side of the Atlantic, some are concerned about the outcome of France's presidential elections. For the time being, it appears as though EUR/USD will struggle to bounce.
Fundamental Analysis of the AUD/USD
Down under, the AUD continues to struggle following the RBA's less dovish tilt.
For the time being, the hawkish FED has stifled the rise higher's short-term momentum. However, the AUD's problems are exacerbated by China's extremely permeable risk environment and the market's growing concern about global economic risk. The AUD's tumble into the plunge pool is aggravated by the early beginnings of a FOMC trigger taper tantrum, which could see demand for the US dollar reign supreme.
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