Yesterday’s “the Fed is getting on top of inflation” was today’s “the Fed is struggling to get on top of inflation.”
That’s if you need a narrative to explain inexplicable price action. Don’t get me wrong. There’s always an explanation. If you were omnipotent, you could map every transaction, determine the impact of each one and come away with the full story. But even the “best” AI isn’t capable of such feats (yet), so we’re left with stories. Sometimes they make a lot of sense. Sometimes not so much.
On Thursday, the only story that mattered was the simple one: Global shares were sharply lower (figure below). The good vibes engendered by confused post-FOMC jostling on Wall Street Wednesday were confined to early Asian trading. It was all downhill from there.
Correlation isn’t causation, but the Fed, the BoE and the SNB delivered 150bps worth of rate hikes between them over 24 hours. That’s a lot of tightening in one day, and there was no shortage of “they’re going to break something” banter on Thursday.
Another manic day in rates found US yields round tripping — and then some. Optically, it was a bull steepener, but it’s all tasseography at this point. The wild swings aren’t doing much to bolster confidence, that’s for sure, especially considering that a non-trivial percentage of traders have never witnessed yield swings of this magnitude in their professional careers.
“The steepening nature of the bullishness was a notable divergence from the trend that has defined US rates recently, even if most of the chatter on Thursday credited the price action with flow-driven position squaring after the Fed and ahead of the long weekend as opposed to anything fundamental,” BMO’s Ben Jeffery and Ian Lyngen said.
As for the S&P, we can call this a real bear market now. Thursday’s selloff brought the drawdown to almost 24% (figure below).
Big-cap US tech closed at the lowest levels since November of 2020.
Geopolitics aren’t helping. The Kremlin is curtailing gas flows to Germany and Italy, citing technical problems. If the curbs aren’t deliberate, as Moscow claims, the timing is some coincidence. Mario Draghi, Emmanuel Macron and Olaf Scholz were in Kyiv Thursday for a meeting with Volodymyr Zelenskiy.
To be sure, there is a technical problem. And it is related to sanctions. And the nature of the problem does underscore the extent to which sanctions are impeding logistics with the effect of disrupting supplies and driving up costs. But there’s also a technical solution which, so far anyway, the Kremlin has refused to pursue.
Reduced Russian flows are another headache for Europe at a time when already inadequate supplies were strained further by a fire at a key Texas LNG facility, which remained closed.
Soaring prices mean Moscow can live with lower volumes. Through mid-June, Gazprom’s exports were down 13% MoM. Shipments are down almost 30% YTD from the same period a year ago, according to Bloomberg’s math.
In any case, the war is an ongoing drag on market sentiment. If that’s all it is to you, count yourself lucky. For untold scores of people in Ukraine, it’s much more than that.
In the US, recession hysteria has set in. JPMorgan looked at the historical behavior of different asset classes around past recessions to derive simple, market-implied probabilities (figure below).
US stocks were pricing an 85% chance of a downturn, and that was before Thursday’s rout.
As the bank’s Nikolaos Panigirtzoglou cautioned, recession fears can become recession reality if they persist.
“Whether one looks at web searches or market pricing there appears to be heightened concern about the prospect of a US recession,” he said. That “by itself has the potential to become self-fulfilling.”