Daily Market Comment – Fed officials fire another shot at stocks, sterling recovers



  • Fed warnings and solid US data deal another blow to equity markets 
  • Dollar takes another step back as euro and sterling reclaim lost ground
  • Russia set to annex Ukrainian territories, Fed vice chief deliver remarks
Wall Street selloff

A stormy quarter is drawing to a close. Hopes for a soft economic landing have all but vanished as the Fed continues to beat the drums of forceful rate increases, sending financial markets into a tailspin. With bonds getting blasted alongside stocks, and even commodities rolling over lately, there has been nowhere for investors to hide.

Stock markets took another beating yesterday at the hands of some solid US economic indicators and more resolute Fed rhetoric. The number of Americans seeking unemployment benefits keeps grinding lower week after week, signaling that the labor market remains incredibly tight despite the Fed’s best attempts to cool demand. 

Meanwhile, the chief of the Cleveland Fed raised the stakes further, saying that even a recession would not deter the central bank from raising rates. Of course, the Fed has to say that otherwise the market will start to price in rate cuts again, nullifying some of the tightening that has already been rolled out and making the battle against inflation even harder. 

The S&P 500 lost around 2% as fears of over-tightening by the Fed and quarter-end flows joined forces, in the absence of any real corporate buying since most companies are now in their ‘buyback blackout’ window. Generals such as Apple and Tesla that were carrying the market on their shoulders for months suffered the most damage, leaving a leadership vacuum that is often a harbinger of more weakness. 

FX retracements

In the FX complex, the dollar took a step back this week but it is still about to close the quarter with tremendous gains. The reserve currency has been on a roll this entire year, capitalizing on a perfect storm of interest rate differentials widening in its favor as the Fed outguns other central banks, safe-haven flows, and an absence of any attractive alternatives. 

On the opposite side of the coin is the euro, which managed to claw its way higher this week after getting bulldozed the entire quarter. While the fundamentals are improving on the margin, with Germany announcing a EUR 200bn energy plan to shield consumers and the ECB getting serious about defending the currency, a trend reversal is still difficult to envision with business surveys warning of an imminent recession. 

Nerves surrounding the British pound seem to have calmed for now, with Cable staging a fierce comeback from the record lows it brushed earlier this week. The Bank of England seems to have restored order, although nothing much has changed overall. Sterling is still at the mercy of global risk sentiment thanks to the nation’s swelling twin deficits, with the correlation between Cable and the S&P 500 running at an astonishing 93% over the last month. 

Geopolitics and Fed speak

As for today, geopolitics will be back on the radar. Russia’s president will attend a signing ceremony at 12:00 GMT to annex four more areas of Ukraine following some ‘referendums’ in those regions. Markets have stopped paying much attention to this conflict, yet the recent advances by Ukraine alongside the military call-up by Russia suggest the war is likely to drag on, and even escalate.  

On the data front, the highlights include the latest Eurozone inflation numbers and the core PCE price index from the US. Finally, the Fed’s second-in-command will deliver some remarks at 13:00 GMT. Brainard doesn’t speak often, so traders will pay attention. Another warning that the Fed will do whatever it takes to extinguish inflation could keep equity markets under pressure. 

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