A renewed sense of fear is gripping the global economy today and risk aversion is at the forefront of every trader’s mind, and as a result, the United States Dollar is trading in wildly mixed directions but with a decidedly negative overall direction.
Overview
Overnight Asian equities were routed, with the Japanese Nikkei index falling more than 12% alone. Markets have taken an abrupt turn since the Federal Reserve policy decision last Wednesday as a whole. Following Friday’s non-farm payroll report, traders have begun in a big way to question the Fed’s policy decisions leading up to this point. The dreaded term ‘recession’ is being thrown around once again after unemployment grew sharply last month, and many leading market participants are speculating that the ‘soft landing’ Goldilocks scenario that, up until a few weeks ago was the assumption, may not happen after all.
Whether such recessionary fears are merited or not, bond traders have been piling into bets of Fed rate cuts at nearly record levels, at one point overnight even pricing in a 60% chance that the Fed would be forced into a 25-basis-point ‘emergency cut’ sometime in the next week. The bar for such a decision, however, is extremely high and such bets have since faded. Nonetheless, bond traders have now fully priced in 50 basis points of easing at the Federal Reserve’s September meeting and expect more than 125 basis points of cuts this calendar year. In response, DJIA futures are down more than 1,000 points at the time of writing, and the Nasdaq is expected to open nearly 5.5% lower than Friday’s close. Tech stocks, the Nasdaq’s bread and butter, are leading the global rout, as shares in Nvidia and Apple have plummeted overnight.
We expect this morning’s deep concern over the health of the global and US economy to moderate itself somewhat through this week, but the risk of a so-called ‘panic spiral’ around the world is real and may well be a primary driver of price action today. Safe haven currencies, with the exception of the US Dollar (as the US is a primary driver of this morning’s panic), are outperforming in a big way. Geopolitical dynamics, too, are heavily in play right now after Iran threatened retaliation against Israel’s actions against Hezbollah and Hamas leaders over the weekend
What to Watch Today…
- S&P Composite PMI, Monday 9:45AM
- Banxico Meeting, Thursday
- Monex USA Online is always open.
EUR ⇑
The single currency, after taking heavy losses against USD to open this year, is attempting to claw back some ground this morning and has gained just shy of a quarter of a percent against USD. The EUR/USD pair is now sitting much closer to prices last seen just before both the Fed and ECB meetings last month, more in line with the macroeconomic data out of the region. French CPI this morning showed inflation increased 4.1% annually, with Germany’s year-over-year inflation slightly lower at 3.8%.
JPY ⇑
Japanese Yen is once again at the center of morbid global intrigue as the currency, in a bit of a spiral effect with Asian equities, gained nearly three percent against USD at the time of writing, hitting at one point its strongest level against USD since January. Japan’s benchmark 10-year yield fell to its lowest level since April as global panic gripped markets. The carry trades of shorting Japanese Yen against other higher-yielding currencies has unwound in a major way over the last week, after the Bank of Japan instituted a very hawkish interest rate hike last week. After several rounds of currency intervention and actions from the BoJ, the Yen is finally showing substantial strength, but the ripple effects of such movement have clearly reverberated around the world.
