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Growth scare sinks stocks, adds fuel to US dollar rally


Stock market tumbles as earnings season and US slowdown scare traders

Dollar the only place to hide - extends gains against euro and sterling

Aussie jumps after inflation spike, Facebook earnings in the spotlight

Wall Street loses altitude

A sense of panic crept back into stock markets on Tuesday. The Nasdaq Composite lost almost 4% as investors slashed their exposure to riskier assets, stressed about a slowdown in economic growth and corporate earnings that could be compounded by a meteoric rise in interest rates.

There wasn’t any clear news catalyst behind this selloff, which suggests it was driven mostly by deleveraging among big players trying to protect their portfolios from any deeper losses. The earnings season has been mixed so far, with management warnings about the macro outlook being negated by a high percentage of companies beating analyst estimates.

The underlying theme has been how unforgiving this market is - strong corporate results are not rewarded very handsomely but any disappointments are punished severely. Investors are playing defense and have zero patience for underperformance with rising interest rates and an economic slowdown around the corner.

On the bright side, bearish sentiment is reaching extreme levels and we might be close to the peak of hawkish Fed expectations. Markets are pricing in four 50 basis point Fed rate hikes in a row while the Atlanta Fed GDPNow model points to almost stagnant growth in the first quarter. The central bank debate might shift from fighting inflation to preventing a recession relatively soon.

Dollar roars, euro and sterling slide

Over in the FX spectrum, the US dollar has been the undisputed winner from the latest round of risk aversion as traders desperately seek a hedge. The greenback extended its winning streak against most rivals, with euro/dollar piercing below the 2020 lows today following news that Russia halted gas supplies to Bulgaria and Poland.

The bad news for the euro just keeps piling in. Consumers are already feeling the burn of rising living costs and with Chinese cities shutting down, demand for European exports is crumbling. The technical picture is a horror show too and it is probably a matter of time until the narrative turns into whether euro/dollar will reach parity.

Another casualty of the dollar’s rampage has been sterling, which lost 3.5% in three trading sessions thanks to its sensitivity to equity markets alongside concerns the Bank of England might backpedal and deliver fewer rate hikes in the face of slower growth.

Aussie inflation heats up, Facebook reports

Inflation in Australia reached 5.1% in the first quarter, sparking bets that the Reserve Bank will panic and raise interest rates next week. A quarter-point rate hike has already been priced in and markets expect the RBA to deliver another nine before the year ends.

This helped breathe some life back into the battered Australian dollar, although most of those gains disappeared later on. Even though the domestic economy is solid, it is hard to believe the RBA will raise rates with such reckless abandon when the Chinese economy is in dire straits. Hence, the risks surrounding the aussie remain tilted to the downside.

As for today, the spotlight will fall on Facebook-owner Meta Platforms, which will report earnings after Wall Street’s closing bell. The stock has lost almost half its value so far this year amid concerns over metaverse investments and plateauing user growth, putting even more emphasis on this report.

Other household names reporting their quarterly results today include Boeing, Paypal, Ford, Kraft Heinz, and Spotify.

Source: https://www.xm.com/research/analysis/marketComment/xm/daily-market-comment-growth-scare-sinks-stocks-adds-fuel-to-us-dollar-rally-159500
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