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Euro/dollar slices below parity, stocks worried about Fed


Deepening European energy crisis sends euro/dollar beneath parity

Stronger US dollar helps the move amid bets for more assertive Fed

Wall Street keeps sinking, tech leads the retreat as yields climb back

Parity cracks

A perfect storm has engulfed euro/dollar, which cracked below the famous parity level to trade at a new two-decade low thanks to a deepening energy crisis in Europe and a US dollar that has been supercharged by bets that the Fed might wrestle back control of financial conditions.

European natural gas prices have gone through the roof, eclipsing previous record highs after Russia announced it will shut down its main pipeline for another three days this month, sending an already undersupplied market into full panic mode.

Energy prices at current levels will paralyze heavy industry and crush consumer spending power, almost ensuring a deep recession that the ECB cannot deal with, since it also carries inflationary implications.

The latest PMI business surveys add credence to the view that the Eurozone is in dire straits, as the persistent weakness in manufacturing seems to have infected the far-larger services sector in August. Mired in uncertainty, companies are reporting declines in new orders and slower hiring activity, spelling bad news for future economic growth.

Other than a ceasefire in Ukraine coming out of the blue, it’s difficult to see what can turn the euro’s fortunes around.

Dollar charges higher

On the other side of the euro/dollar coin, the US dollar has gone berserk lately, smashing everything in its path. Without any significant data releases, the latest surge likely boils down to positioning adjustments ahead of the Fed’s Jackson Hole symposium later this week.

It seems to have dawned on investors that the Fed isn’t happy with market pricing for rate cuts next year. This expectation is keeping Treasury yields artificially low, making life harder for a central bank that is still in inflation-fighting mode. Speculation is running rampant that Chairman Powell will attempt to ‘right the ship’, perhaps by stressing rates will remain higher for longer.

Another currency that’s been run over by the runaway US dollar train is sterling, with Cable briefly falling to new post-pandemic lows as the souring mood in equity markets also inflicted damage. The striking part is that Cable almost ignored the two-month relief rally on Wall Street, but the moment stock markets started to tank, this correlation returned. There’s an asymmetry there - sterling appears more sensitive to negative global developments than positive ones.

Stocks worried about Fed

It was another bruising session for Wall Street. The S&P 500 lost more than 2%, with consumer discretionary and tech shares spearheading the decline, while measures of implied volatility such as the VIX ‘fear index’ rose sharply as demand for protection made a comeback.

There was no news catalyst behind this selloff, which instead seems to have been driven by a spike higher in Treasury yields that compressed equity valuations and the recent short-squeeze simply running out of juice. Traders are likely front-running the Jackson Hole trade, where the Fed might attempt to quell speculation that rates will be cut next year.

As for the rest of today’s highlights, the spotlight will fall on the latest S&P Global PMI business surveys from America and new home sales. Both are forward-looking indicators of economic activity and will therefore be crucial for investors trying to piece together where the terminal Fed funds rate is and how long it will stay there.

Source: https://www.xm.com/research/analysis/marketComment/xm/daily-market-comment-euro-dollar-slices-below-parity-stocks-worried-about-fed-165360
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