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European stock markets are deeply negative in early trade on Monday after a steep sell-off on Wall Street on Friday against the familiar backdrop of inflation and rising interest rates. The FTSE 100 declined by about 1.5% to 7,400, taking it back to its lowest level in a month. The DAX edged down by about 1% to 14,000. The Dow suffered its worst daily loss since 2020 on Friday, sliding 2.82%, taking its weekly loss to almost 2%, whilst the S&P 500 closed down 2.8% for the day and the week. The Nasdaq finished the week down 3.8% as rising bond yields weighed on tech/growth more than others. The Nasdaq 100 is down 7% from its Thursday high and now just 2-3% away from the March low. The decline in Europe also comes against the backdrop of a sharp decline for Asian markets overnight. Chinese stock markets were off by 4-5% amid rising Covid cases, restrictions etc. The Hang Seng fell 4%, while the Nikkei was down almost 2%.  

 

There’s been a sharp reversal in stock market sentiment since Thursday, when Jay Powell stressed that taming inflation is “essential” and said a 50bps hike is on the table in May….this we know. But market sentiment turned anyway as it underscored the gigantic pivot the Fed has performed in just a few weeks. Some chatter about a 75bps hike was heard from arch-hawk James Bullard, but this is not terribly plausible. Increasingly though it looks like the FOMC will opt for 50bps. No Fed speakers this week as it’s the blackout period ahead of their meeting of May 3rd-4th. A huge slate of earnings, including many of the big tech beasts that have had their share price whacked of late. US GDP and core PCE data is also out this week.

 

USD steamroller: The dollar continues to advance as US yields climb, with the dollar index rising smartly above 101 to hit its highest level since Mar 2020. Dollar doomsters and gloomsters always get burned this way – whenever there’s chatter about the ‘end of dollar hegemony’ you can rely on it rallying. I mentioned this at the start of March, arguing for Russia’ invasion of Ukraine to ultimately lead to “dollarisation and a shortage of dollars to be the main effect and for a sharp move higher for USD as a result”. The US 10yr yield hovers around 2.9%, close to last week’s peak.  

 

The euro was weaker despite Macron’s victory over Le Pen. This is more about dollar strength than anything political…Macron is the continuity/stability candidate, so the market is not reacting to his expected win. EURUSD plunged to 1.070, its lowest since Apr 2020. Sterling was also sharply lower against the greenback, with GBPUSD touching 1.2750, another 18-month low. 

 

Lockdowns in China – and fears that these will spread and persist – is hitting sentiment in commodity markets. US oil futures slid $4 to $98, whilst Brent slid a similar amount to $102. 

 

Musk stuff…so it looks like the saga that I left behind more than two weeks ago could be coming to an end….maybe. Musk has reportedly met the board over the weekend as they explore his $43bn offer. A deal could be finalised as early as this week, according to sources cited by various financial media. Meanwhile Musk continues to be Musk

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