Daily Market Comment – Wall Street under pressure as growth risks dominate



  • Markets price in Fed rate cuts for next year as recession woes deepen
  • Dollar powers up, euro/franc breaks below parity, stock futures drop
  • Oil retreats ahead of OPEC decision, America moves to ban TikTok
Fed rate cuts? 

An abysmal quarter for financial markets is finally drawing to a close, with bond and equity investors left shell-shocked from the relentless barrage of rising interest rates. The only winners in this gruesome inflationary environment were the US dollar and oil prices, as the Fed beat other central banks to the punch and the scarcity in energy markets intensified. 

But things seem to be changing. Escalating concerns around the growth profile have eclipsed inflation as the dominant threat, fueling bets that the Federal Reserve will be forced to backpedal and resort to rate cuts once again next year to prop up the economy. Eurodollar futures, Fed funds futures, and interest rate swap contracts tell the same story - rates will peak around the first quarter of 2023 followed by rate cuts in the second half of the year. 

Market participants are essentially forecasting a recession, betting that the medicine for inflation will kill the patient. The traditional warning signs are already flashing red - business surveys point to faltering demand, hiring is slowing, inventories are high, home sales are dropping, and consumer confidence is in the gutter. 

If this growth scare persists, the coming quarter could be characterized by a stabilization in yields as traders seek refuge in bonds, which might come as a breath of fresh air for the Japanese yen that has been bulldozed by rising yields this year. 

US dollar and Swiss franc in fashion

In the currency market, the usual suspects continue to outperform as traders grapple with growth concerns. The US dollar remains king, thanks to its unique ability to provide both attractive returns and protection against negative outcomes, in contrast to the euro that offers neither and is instead haunted by high energy prices.  

Meanwhile, euro/franc fell without a parachute yesterday to settle below the psychological parity level. With the SNB determined to exit negative rates and halting its FX interventions at a time when the global economy is experiencing a growth scare and the euro has been shellacked, the path of least resistance for the pair remains lower. A weekly close below parity would solidify that. 

Stock futures drop, oil retreats

Wall Street closed another volatile session in the black on Wednesday, torn between signs that inflation is finally cooling but an economic slowdown might be looming. Meta Platforms shares outperformed after the Federal Communications Commission chief urged Google and Apple to ban rival social media platform TikTok from their app stores, effectively describing it as a Trojan horse that poses national security concerns by allowing Beijing to collect sensitive data. 

Futures are currently underwater by 1%, pointing to another round of selling when US markets open today, without any clear catalyst behind this deterioration in sentiment. The latest PMIs from China stormed back into expansionary territory, boosting local equity markets but little else. 

Oil prices retreated yesterday, despite a larger-than-expected drawdown in weekly US inventory reports. Expectations are riding high that OPEC will ratify the production increases it has already announced, but the White House’s energy envoy hinted there may be more to come yesterday, which is likely what spooked oil prices. 

On the data front, the core PCE price index for May could attract some attention. The yearly rate has been falling steadily since February, confirming that the acceleration in headline inflation since then boils down to energy and food prices after the Ukrainian invasion. 

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