Volatility cools after hectic week
Volatility in equity markets has faded following the flurry of central bank meetings this week. The dust has settled, and we have seen a reversal of fortunes as stock markets are mixed and the US 10-year yield has cooled. The mood might be less fearful, but dealers have not forgotten about the commentary from Jerome Powell, who cautioned the possibility of a recession has increased. Earlier this month, the World Bank downgraded its forecast for global growth, and there is speculation the IMF will lower their outlook again. Economies are cooling as the post-pandemic boom is over, but at the same time, central banks are lifting rates in an effort to get a handle on inflation. In the past 48 hours, the Fed, the BoE and the SNB hiked rates, and it seems as if further rate hikes are on the agenda.
Yesterday the S&P 500 tumbled to a 19-month low amid worries the US economy could be edging towards a recession. Today, the market enjoyed a short-lived bounce, but it has since handed back most of the gains. It says a lot about the sentiment in US stocks when they can’t hold onto a modest rally, even for one session. It is similar situation in Europe as the DAX and the CAC are off their respective highs and the FTSE 100 is showing a small loss. The performance of industrial metals is often seen as a good indicator for how traders feel about the world economy, and seeing as copper and palladium are down in excess of 2.5%, it underlines the bearish mood.
The major rally in the US dollar has pushed EUR/USD, GBP/USD and AUD/USD deep into the red. It seems as if the greenback has made a remarkable recovery from yesterday’s painful decline even though faint recession fears are hanging over the US. Gold has retreated from its recent peak as the jump in the greenback has impacted the yellow metal. The various rate hikes by central banks have pushed up bond yields in recent weeks and in turn, that has diminished demand for gold. WTI has lost over 5% as concerns about falling demand have hit the market hard.