Inflation anxiety triggers market chaos

The BoE raised interest rates by a quarter of a percentage point for the fourth consecutive time in London on Thursday, taking the UK benchmark rate to a 13-year high of 1%, and joining the Fed and RBA in tightening monetary policy this week.

Anxiety spilled over to Wall Street where the tech-heavy Nasdaq cratered 5% in its biggest one-day drop since the peak of the pandemic in June 2020, while the S&The P 500 fell 3.6%, wiping out around $1.3 trillion in market value.

On the ASX, Macquarie Group sank $15.76 to $186.90 after refusing to issue guidelines when booking a 56% increase in net income for fiscal 2022, reaching net income of $4.7 billion.

“We continue to maintain a cautious stance,” Macquarie told the market.

Thursday’s pain on Wall Street and Friday’s tumble in Asian regional markets undid a strong rally from the previous day’s trading. Markets were galvanized by Fed Chairman Jerome Powell’s promise not to follow through on an oversized 75 basis point rate hike.

Rates traders are not convinced.

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“With no obvious news flow to explain the abrupt reversal, it seems rather that Powell’s relief that the 75 basis point moves were probably a step too far has given way to a renewed focus on high inflation and challenging growth prospects,” National Australia Bank said. said economist Taylor Nugent.

The Fed this week opted for a half-percentage-point hike, which it said was also on the table at Fed policy meetings in June and July. The U.S. cash rate, known as the federal funds rate, is between 0.75% and 1%.

On Tuesday, the RBA raised interest rates for the first time in more than a decade to 0.35% from a record low of 0.1% and promised further tightening to come.

Bond yields resumed their surge, with the 10-year US Treasury note hitting 3.1%, its highest level since 2018. The two-year US bond, which is more sensitive to interest rate expectations in the short term, climbed 6 basis points to 2.7. percent.

$A headwind

These movements were reciprocated in the local market, where the Australian 10-year bond yield jumped 12 basis points to 3.5%. The three-year bond jumped 10 basis points to 3.2%.

Demand for safe havens pushed the US dollar to a 20-year high against a basket of major currencies, while the pound fell to its lowest level since June 2020.

The Australian dollar fell from an intraday high of US72.66¢ to US70.77¢ before stabilizing around US71.20¢.

Commonwealth Bank strategists said the main hurdle to the local currency was concerns over China’s economy due to its strict COVID-19 policies, which left dozens of cities in full or partial lockdown.

This could be partly offset by an easing of policy in China as the government tries to meet its official growth target of 5.5%, which is increasingly questioned by economists.

“We expect the acceleration of infrastructure investment to support the Chinese economy and the Australian dollar. Nevertheless, we believe that a significant recovery of the Aussie will force China to ease its strict anti-corruption policy. COVID-19 [which] will likely happen in the second half of 2022,” said Carol Kong, senior currency strategist at Commonwealth Bank.

The bank expects weak economic data in China to drive the Australian dollar lower in the near term, pointing to China’s monthly “data dump” on May 16 as the next key event.

The Australian dollar’s weakness came despite oil prices stabilizing near three-week highs on fears that Europe will struggle to replace the 3.2 million barrels per day of fuel that it imports from Russia, as the region plans to impose a ban within the next six months.

Brent crude gained 0.6% to $110.85 a barrel and West Texas Intermediate edged up 0.3% to $108.14 a barrel.

As the Organization of the Petroleum Exporting Countries and its allies agreed to increase production by 432,000 barrels per day in June, supply problems are intensifying, with data from Bloomberg showing that production has only increased than 10,000 barrels per day in April.

“The group is struggling to meet its production quotas due to disruptions and a lack of investment in the fields. The lagging production is unlikely to change anytime soon, especially given lower demand for Russian oil, which will eventually lead to lower production,” said Warren Patterson, head of materials strategy. firsts at ING.

Meanwhile, spot iron ore prices rose 2% to US$145.80 a tonne on Thursday as traders in China returned from a five-day holiday.

Traders are eager to see the April US Labor Force report at 10:30 p.m. AEST on Friday, a report that NAB says will show the US economy added 390,000 new jobs last month.

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