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Collinson FX: June 15 - Markets into 'Bear' territory

by Collinson FX 14 Jun 16:24 PDT 14 June 2022
Clockwork - Melges 40 - Doyle Sails Winter Series - Royal New Zealand Yacht Squadron, May 7, 2022 © Richard Gladwell, Sail-World.com / nz

Markets are crashing across the Western world, with equities charging into ‘bear market’ territory, while crypto’s collapse.

US Bond yields have woken up, with the 10 year yield hitting an 11-year record high (3.45%), while the yield curve flirts negative. The trigger for the latest round of ‘risk-off sell-offs’ was the latest US inflation number, blowing through expectations, at 8.6%. The markets were expecting inflation to have peaked, but it is accelerating upwards, leading the Fed to even more aggressive action. The Fed will probably raise 50 basis points, but will perhaps consider 75 basis points, despite ruling this out at the last FOMC meeting. Inflation is a economy wide cancer and now the hit to the consumer is starting to be realised, with demand lead problems, as discretionary spending is eaten up by basics of food and energy. The West has only exaggerated the problem by imposing sanctions on the world resource super-power, Russia. The flight to safety in the currency markets has seen the EUR fall to 1.0400, while the GBP has collapsed to below 1.2000, ahead of the Bank of England meeting.

US PPI remained extremely high (10.8%), which will feed directly through to inflation numbers, further aggravating the critical situation. Inflation is killing the consumer and trashing citizens standards-of-living, across Western nations, while proving an existential threat to less developed nations. Food and energy prices are key to sustaining life and spiralling costs threaten the vulnerable populations, the most. The commodity currencies have suffered the safety of the rising reserve, with the AUD crashing to 0.6850, while the NZD plunged to 0.6200. Currencies will remain extremely volatile, as Central Bank policy decisions play out in the markets. ‘Transitory Inflation’ should be a repetitive nightmare phrase haunting politically co-operative Central bankers.

June 14: The rout on equity markets continued overnight, to open the new trading week and spread to bond and currency markets

The ‘red hot’ US inflation number, blew away expectations and destroyed the narrative of inflation having peaked. The headline number surged to 8.6%, which has triggered a surge in US bond yields, with the yield curve briefly turning negative again. This is a technical event, which is an indicator of a looming recession, ahead of the FOMC meeting this week. The Fed was expected to raise rates, but considering the latest inflation number, the question will be, ‘will they raise rates by 50 basis points or more’?

The US inflation surprise followed the ECB meeting, that downgraded GDP growth expectations and the inflation outlook, but failed to raise rates. The ECB indicated they will raise rates, but the lack of urgency will prove very costly. The surge in US Bond Yields and the flight to safety, sparked a further rally in the US Dollar. The EUR crashed to 1.0420, while the GBP slumped to 1.2130, as economic data is reflecting the dire economic position the UK is in. UK GDP turned negative for April, along with Manufacturing and Industrial Production, ahead of the key Bank of England meeting scheduled for Thursday.

Commodity currencies suffered the resurgent reserve, with the AUD plummeting to 0.6930, while the NZD fell back towards 0.6250. These currencies are being slammed by the resurgent US Dollar and the prospect of recession hitting demand, despite high commodity prices. Market turmoil is set to continue.

Commodity currencies have been beneficiaries of strong commodity prices and a softer reserve, with the NZD consolidating above 0.6500, while the AUD looked to regain 0.7150. Rising interest rates attract flows to support these currencies, with the RBNZ aggressively raising interest rates, while the RBA interest rate train has just left the station. Inflation and cost-of-living will drive consumption and demand lower, while the looming recession will be hard to avoid.

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