Bear Market Time for Equities But A Grand Time for the Dollar

June 13, 2022

Last Friday’s U.S. CPI report that revealed a 485-month high 8.6% rate of inflation exceeded expectations and drove a big nail into hopes that a return to in-target inflation can be restored in a sustained way without going through an economic recession. The Federal Open Market Committee will announce another interest rate hike this Wednesday. It is expected to match the previous 50-basis point increase, and forward guidance may flag the risk of even larger increments at ensuing policy reviews. Lifting the rate merely back to neutral territory will not be enough to get the job done.

Equities tumbled around the world overnight, dropping 3.5% in South Korea, 3.4% in Hong Kong, 3.0% in Japan, 2.7% in India, 2.4% in Pakistan and Taiwan, 1.9% in New Zealand, and 0.9% in China. Australia was spared from the carnage because of its Queen’s Birthday holiday closure. European markets in Germany, France, Italy, and Spain are all down at least 2.0% on the day so far, and the British Ftse has fallen 1.6%. In U.S. stock futures trading, the Nasdaq has plunged 2.9% to 29.1% below its 52-week high. The S&P 500 is 2.2% lower and entered bear market territory with a 20.9% drop from its prior crest, while a 1.8% overnight drop in the DOW put such 16.5% under its prior peak. It’s only a matter of time before all three exceed the 20% yardstick for a bear market.

Long-term interest rates aren’t waiting for central bank action. Ten-year sovereign debt yields leaped this Monday by 18 basis points in Italy, 16 bps in Spain and Portugal, 12 bps in France, 8 bps in Germany and ten basis points in U.S. futures.

The DXY weighted dollar index climbed 0.6% overnight and, at 104.8, has almost returned to last month’s peak of 105.0 after retreating to 101.67 in between. The U.S. currency appreciated 1.9% overnight against the Mexican peso, 1.5% versus the Australian dollar, 1.4% vis-a-vis the New Zealand dollar, 1.1% relative to sterling, 0.7% against the Canadian dollar, 0.6% versus the Swiss franc, and 0.5% vis-a-vis the euro.

Bank of Japan officials are standing put. After decades of being frustrated in their attempt to lift inflation back to 2.0%, they are determined to not let this global jolt of price pressure go to waste. The ten-year JGB yield did not move overnight, and dollar/yen touched 135.2 overnight, the yen’s weakest level since 1998.

The price of WTI oil dipped back under 120/USD and shows a 1.9% overnight drop to $118.75 per barrel. Gold fell 0.9%, and the price of a Bitcoin dived 10.8% today to $23,682, its weakest since late 2020.

Not much data have been released this June Monday. Japan’s Ministry of Finance reported results of its quarterly survey of business sentiment, which for large companies saw the diffusion index below zero for a second straight period but, at -0.9, above the first-quarter reading of -7.5. Further recovery is expected during the second half of this calendar year.

British industrial production posted a month-on-month drop for a third consecutive time in April, and the 0.6% decline was larger than those in February or March. Factory output slumped 1.0% on month and rose just 0.5% on year compared to an expected 1.8% increase. Construction output in the U.K. sank 0.4% on month, its first decline in a half year, and the year-on-year rise of 3.9% was down from 10.6% in January.

Britain’s massive trade deficit narrowed to a four-month low in April of GBP 8.5 billion for goods and services and GBP 20.893 billion for just goods.

British monthly GDP fell 0.3% in April versus March and was just 0.2% greater in February-April versus the previous three months.

Serbian CPI inflation rose another 0.8 percentage points in May to a 109-month high of 10.4%. That compares to inflation of 3.6% in May 2021.

Turkish industrial production was unchanged on month during April but 10.8% larger than in April 2021. Retail sales in Turkey increased 2.1% on month and 14.7% compared to a year earlier.

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


Tags: , , ,


Comments are closed.