Stocks close to cliff edge as markets wary of rate hikes

Overnight Headlines

*US stocks dip, bond yields climb on tightening concerns

*Euro hits two-year low on ECB interest rate caution

*USD/JPY looks to solidify upside breakout ahead of the holiday weekend

*PBoC leaves policy unchanged despite calls to bolster the economy

US equities closed lower as investors worried about the potential for aggressive US policy tightening while other central banks moved to reduce support. Stocks had gained the day before on hopes price increases could be peaking. Growth stocks led the declines with the Nasdaq falling 2.1%, the S&P500 lost 1.2% and the Dow 0.3%. European and US equity markets are closed today.

USD climbed higher, mainly on the back of a weaker euro. DXY made a new pivot top at 100.76, a level not seen since April 2020. The pandemic crisis highs sit just below 103. EUR posted a new cycle low at 1.0757 before closing above resistance/support at 1.0805. GBP was mixed and kept below 1.31. USD/JPY continues to head north. The major is up ten days in eleven, with the one down day being a narrow range doji. AUD softened and is trading around 0.74 support. USD/CAD regained a bid and is trying to stay above 1.26.

Event Takeaway – ECB less aggressive but normalisation continues

The ECB said it plans to cut bond purchases this quarter and then end them ‘at some point’ in the third quarter. But the tone of the comments was mixed with threats to growth heading in the wrong direction, coupled with risks to inflation being to the upside.

The euro plunged as markets viewed the comments by Lagarde as a sign that the bank was in no rush to raise interest rates. Excitement had been high that the bank would be more hawkish. But the ECB, will in its own way, proceed differently to other central banks moving to a more normal policy, “at a snail’s pace” as one investment bank called it. The next meeting will be in June so eight weeks away, which is unprecedented. New staff macro projections will be released.

The downtrend for the euro should remain firmly intact. The market got ahead itself by expecting eight rate hikes by the end of 2023. The lack of a firm commitment from Lagarde that QE would definitely end in June also raises uncertainty about the ECB’s intentions going forward.

Chart of the Day – S&P500 looks precarious

Worries over rising bond yields have again riled stock markets. The punchbowl of liquidity and stimulus is being taken away. Investors have seen hefty rate hikes by the RBNZ and BoC this week. There’s also been a surprises rate rise by the Bank of Korea as well as policy tightening by the Monetary Authority of Singapore. Until inflation is under control, there’s much uncertainty, but more hikes are definitely coming.

The S&P500 made a swing high at the end of March at 4637 before turning lower. Both the 100-day and 200-day SMAs have provided support but are now turning lower. The latter is resistance at 4495. Prices have been trading around the 50-day SMA at 4418. Strong support is 4381 but there is not much in the near-term if we lose this.

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