Market sentiment took a turn for the worst this past week, with a sea of red seen across the world. On Wall Street, futures tracking the Dow Jones, S&P 500 and Nasdaq 100 fell 4.4%, 4.8% and 5.3% respectively. Collectively, this was the worst week since the beginning of this year. This is as the DAX 40, FTSE 100 and ASX 200 weakened 4.8%, 2.9% and 4.2% respectively.
Volatility was back on the rise, with the VIX “fear gauge” up 11.85%. There were a couple of reasons why. The first was a more hawkish European Central Bank, which continued adding to the global monetary policy tightening narrative. Then the week wrapped up with unexpectedly higher inflation in the United States, raising the odds of a 75-basis point Fed rate hike in July.
The latter meant a solid week for the US Dollar, which outperformed every single G10 currency. It did the best against sentiment-linked ones, such as the Australian and New Zealand Dollars. The Greenback certainly enjoyed the benefit of rising yields, with the 2-year Treasury rate surging past 3% to its highest point since the depths of the 2008 Great Financial Crisis.
Gold prices managed to find some momentum despite a stronger US Dollar and surging bond yields, perhaps capitalizing as an inflation hedge. However, XAU/USD has generally been struggling to rise in an environment of 40-year high inflation. Crude oil prices were little changed, giving up some gains as tighter monetary policy bets worked to cool growth expectations.
All eyes next week are on central banks, with the Federal Reserve, Bank of England and Bank of Japan on tap. Friday’s market reaction suggests that the Fed has much more to do than what it has been laying out as it increasingly falls behind the curve of bringing inflation to target. That places the focus not on the 50-basis point hike seen, but on what its next step will be.
The BoE is seen raising rates by 25-basis points to 1.25% from 1%, with focus once again on what is to come. Will the BoJ start showing early signs of pivoting away from its ultra-loose policy with headline inflation now at target? Outside of central banks, Australia will release its latest jobs report. New Zealand will report its first-quarter GDP. What else is in store for markets next?
US DOLLAR PERFORMANCE VS. CURRENCIES AND GOLD
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