June 14, 2022

“The greenback held close to a two-decade peak this morning as Wall Steet hit an expected bear market milestone due to fears that further aggressive rate hikes would ship the US economy into recession.”

Sam Cornford, Partner – Head of Trading

Main Headlines

US stocks closed in a bear market on Monday after a dramatic late-session sell-off, while government bond yields soared, with investors unnerved over stubbornly high inflation and the prospect of aggressive monetary tightening by central banks. Wall Street’s equities benchmark S&P 500 slid 3.9 per cent in New York to close at its lowest level since January 2021. The move left the index more than 20 per cent below its January 2022 all-time high, a decline commonly identified as a bear market. Government bond prices on both sides of the Atlantic also dropped, sending yields to the highest levels in more than a decade, as strong inflation readings drive central banks in the US and Europe to raise interest rates after years of relaxed policy.

Britain’s jobless rate rose for the first time since late 2020 and other measures of the country’s hot labour market cooled, potentially easing inflation worries at the Bank of England which is due to raise rates again this week. With surging inflation weighing on the economy’s recovery from the COVID-19 pandemic, official data showed the jobless rate edged up to 3.8% in the three months to April from 3.7% in the previous labour market report for the three months to March. The increase was the first since the last three months of 2020. Economists had expected the unemployment rate to fall to 3.6%. The rise partly reflected a drop in the economic inactivity rate for working-age adults, which measures people who have dropped out of the labour market altogether and therefore had not shown up as unemployed.

GBP

Sterling is stronger against the dollar and weaker against euro this morning. Boris Johnson defied a chorus of criticism and published legislation to rip up his 2020 Brexit deal with the EU, insisting there was “no other way” of protecting the peace process in Northern Ireland. A pledge on Monday by the CMA to carry out a “short and focused review” of the market comes as consumers face a surge in petrol prices. Last week the average cost of filling a 55-litre family car with a tank of petrol or diesel hit £100 for the first time, up from £71 a year ago, according to breakdown assistance group RAC. The UK taxpayer took on the risk of lending to many businesses that may not have needed financial support to survive the Covid crisis, according to an official evaluation of government-backed pandemic loans schemes.

EUR

Euro is well bid against most major currencies overnight. Conservative parties looked set to win a string of local elections across Italy, but a referendum on justice reform championed by rightist leader Matteo Salvini fell flat. The Swiss National Bank will keep its negative policy interest rate unchanged on Thursday and will not raise it to zero until early next year, according to a majority of economists polled by Reuters, despite the highest inflation in 14 years. As 10-metre-high mounds of sunflower meal smoulder among the blackened ruins of one of Ukraine’s top agricultural terminals, farmers in this front-line region are scrambling to survive a harvest under Russian fire.

USD

The dollar is weaker than most major currencies in the early morning trade. The Federal Reserve is this week set to discuss whether to increase the pace of its monetary tightening in the face of worsening inflation. The Federal Open Market Committee will convene today for a two-day gathering just days after two economic reports suggested that price pressures have become more relentless than expected. Top executives at two of Wall Street’s biggest banks have struck an optimistic tone about the trajectory of the US economy, arguing that consumers were in good financial health despite stark market signals that a recession is looming.

Markets

Stocks in Europe were steady and US equity futures rebounded after a market rout driven by expectations of sharper Federal Reserve interest-rate hikes to fight inflation. Treasuries snapped a four-day selloff. S&P 500 contracts jumped around 1%, signaling some relief after Monday’s plunge that erased $1.3 trillion in market capitalization. Futures on the Nasdaq 100 also rose. The dollar retreated from a two-year high and Treasuries made gains after the 10-year yield had soared to a peak last seen in 2011. The yield curve remained flat, however, underscoring worries about an economic downturn sparked by tighter monetary policy. The Stoxx Europe 600 index pared an early gain to hover around a one-year low.

Main Economic Data/Central Banks/Government (All Times CET)

8:00 a.m.: Germany May CPI
8:00 a.m.: Sweden May CPI
8:00 a.m.: UK April unemployment, weekly earnings
9:30 p.m.: Riksbank business survey
11:00 a.m.: Germany June ZEW survey
2:30 p.m.: US May PPI
7:00 p.m.: ECB’s Schnabel speaks

Corporate Events

Earnings include Ferguson, Ashtead, Didi

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