Equity Sell-Off Intensifies

May 9, 2022

An investor flight to safety gathered further pace amid inflation fears and expectations that central banks will need to speed up their pace of monetary tightening. When the FOMC after its first meeting in 2022 signaled that interest rate increases were coming soon, the thinking was that the central bank would change the rate in increments of 25 basis points. That transformed into 50 bps before long, and 75 basis points has now overtaken 50 bps as the new normal. Many other central banks have already done moves greater than 75 bps.

When equity markets are going south, Mondays tend to be particularly nasty, and this week is no exception. Share prices closed down 4.4% in Indonesia, 3.8% in Hong Kong, 2.5% in Japan, 2.2% in Taiwan, 1.9% in New Zealand, 1.2% in Australia and 1.0% in South Korea. Among key markets in Western Europe, equities so far jave dropped 1.9% in Germany and the U.K., 2.2% in France, 1.8% in Italy, and 1.7% in Spain. Nasdaq futures have plunged 2.4%, and other key U.S. indices like the S&P 500 and DOW have dropped over 1.5%.

Part and parcel with the drop in stock markets has been a rise of long-term interest rates. Ten-year sovereign debt yields today have jumped 10 basis points in Greece, 9 basis points in Italy, 7 basis points in Spain, Portugal and the U.K., and 5 basis points in the United States and Germany.

A marked difference between the current inflationary episode and the one in the 1970s continues to be the rising dollar, a sign of confidence that the Fed and other central banks will not repeat the mistakes of that era. The weighted DXY dollar index set another 21-year high of 104.2 overnight and is 0.2% firmer on balance. The dollar has risen so far today by about 1% against the Mexican peso and both Australian and New Zealand currencies, 0.9% relative to the Chinese yuan, 0.7% vis-a-vis the Russian ruble, 0.0.4% versus the Swiss franc and Japanese yen, 0.3% relative to the Canadian dollar, but just 0.1% against the euro and sterling.

It’s been a tough session for oil and gold prices, which relinquished 2.3% and 1.3% following recent gains. Bitcoin fell 2.5% to a 3-month low.

Rarely in the floating exchange rate era have so many dark clouds arrived at the same time. Soaring inflation has been more symptom than cause of this perfect storm that includes China’s lockdown, the unpredictability of a desperate Russian leader whose war has not gone as he expected but who still commands many WMD, America at war with itself over the quintessential political flashpoint of the past half century, and a world pandemic that won’t fade away. Like the computer HAL on 2001: A Space Odyssey, technological advances that were supposed to make all phases of life much easier and better have unleashed a dark side against which mankind’s social and emotional development has been badly outmatched.

Economic data reported today have been fairly inconsequential and overshadowed by financial market moves.

A 3-month high of $51.12 billion last month in China’s trade balance was subordinated to the revelations that imports had stagnated for a second straight month and export growth slowing from 30% in 2021 and almost 16% year-on-year in 1Q 2022 to a mere 3.9% in April. That was the first sub-10% advance in a year and a half. Meantime, Chinese foreign exchange reserves dropped by $68 billion last month.

Japan’s service-sector and composite purchasing managers indices rose to 4-month highs in April but at 50.7 and 51.1 signaled a weak pace of expansion.

The Saudi Arabian and U.A.E. non-oil purchasing manager indices fell to 3-month lows last month but were each above the 50 level that separates expansion from contraction. The Lebanese and Egyptian PMI readings rose to 11- and 3-month highs but were below 50 at 47.9 and 46.9, respectively.

Indonesian consumer price inflation accelerated 0.8 percentage points to a 32-month high of 3.47% in April. This news arrived concurrently with the release of first-quarter GDP, which dropped 1.0% on quarter but matched the prior quarter’s 5.0% year-on-year advance. Indonesian GDP had dropped 2.1% in 2020 but recovered 3.7% last year.

France’s current account deficit narrowed to EUR 5.4 billion last quarter from EUR 8.7 billion in the final quarter of 2021.

In Norway, industrial production rose 2.2% in March (its biggest monthly gain in three months) and was 3.0% higher than in March 2021. Czech industrial production increased 2.6% in March, reversing a 2.5% slide in February but exceeding its year-earlier level by just 0.4%.

The Sentix measure of investor sentiment toward the euro area economy reflects a big blow from the Russian-Ukrainian war and soaring inflation. The reading of minus 22.6 in May represents a 21-month low and follows -18.0 in April, -7 in March and +16.6 in February.

Copyright 2022, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

 

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