Violent downward correction of the equity markets

US equity markets lost around 4% yesterday. The trend remained very negative in Asia, especially since Sri Lanka defaulted on its debt, which clearly raises the question of possible contagion to other low-income emerging countries, hit by both the downward pressure exerted by the Fed’s monetary tightening on their currencies and by the consequences of the war in Ukraine, notably the sharp rise in the price of agricultural commodities.

The downside in the US this time came from corporate results in the retail sector still showing strong sales but sharply lower margins. Inflation is high, but it could be much worse if companies were able to pass on soaring costs to their selling prices. Another reason was the hawkish statements by Fed Chairman Jerome Powell, which were not new: it is clear that the Fed will continue to tighten its policy as quickly as possible over the next few months, as long as the economy holds up. And that’s what it’s all about in the end: the markets’ concern is gradually shifting from inflation to growth. Risk aversion is rising, as can be seen from the VIX index. The EUR/USD exchange rate has logically fallen back below 1.05 in this context.

China is the focus of concern, entangled in the Covid crisis while its ability to respond through monetary policy is constrained by the property crisis. Japanese trade figures showed the impact of the slowdown in Chinese demand in April with exports slowing to +12.5% yoy.

Today, we will be watching US figures (jobless claims, Philly Fed index, home sales and leading index) but also the minutes of the last ECB meeting for confirmation of the likely rate hike in July.

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