Overnight Headlines

*Dollar dominance crushes Asian currencies as bond yields surge

*Asian shares slide after US stock indices fret over rate hike consequences

*RBA drastically raises inflation forecasts, flags more rate hikes

*Bitcoin plunges the most since January, oil settles near three-week highs

USD found its feet post-FOMC to the detriment of its G10 peers. The greenback recovered all of its losses from the previous day and is back near its recent highs. Resistance sits at 103.82 on the DXY. GBP lost 2.1% after the Bank of England warned of a sharp slowdown in growth later this year, even as it delivered a 25bp rate hike. AUD slid 2% giving up much of its gains since the RBA’s hawkish hike. JPY lost 0.9% while the euro dropped by 0.8% but is still trading above 1.05.

US equities turned sharply lower in a remarkable U-turn from the relief rally a day before. Markets gave back most of their post-FOMC gains. The tech-heavy Nasdaq collapsed, closing 5% lower. The S&P500 was down 3.6%, the Dow lower by 3.1%. Selling was broad based, but tech, autos and semis were smashed. Defensives like energy and utilities held up relatively well. Futures are pointing to a negative open.

Day Ahead – Risk mood turns

It was another crazy day in markets. Here’s a couple of stats. Only eight other times since 1970 (that’s 13,662 trading days) has the S&P500 swung as much as the last two days. Perhaps more significantly, there have only been two days in the past 25 years when the S&P500 futures were down 3% and 10-year Treasury futures were down 1%.

Risk sentiment changed markedly as bond markets ripped lower, taking the widely watched 10-year US Treasury yield aggressively through 3%. Money markets also shifted gear. Despite Chair Powell’s message of the Fed only considering 50bp hikes in the coming two meetings, there is now an 80% chance of a bigger 75bp hike in June. More front-loading underpins further dollar support and a bleak outlook for equity markets.

Chart of the Day – Stock indices near lows ahead of NFP

And just like that, equities plunged, reversing the rather strange post-FOMC rally. The Nasdaq registered its biggest one-day decline since June 2020. More than 95% of stocks in the blue-chip S&P500 ended lower. There were rumours of fund liquidation and it certainly felt that way watching the sea of red.

We have NFP to round off the week. Consensus sees an increase in the headline number of around 400k. Another drop in unemployment to 3.5% is expected. Following last week’s Employment Cost Index shock of a 1.4% quarter-on-quarter increase, focus will be on wage growth. Another strong rise in average earnings tomorrow warns that the Fed has its work cut out in trying to keep inflation under control. A weak close below the February low at 4114, and especially yesterday’s trough at 4062 would be ominous. Markets would be helped by “bad” news from NFP. Resistance is 4222 and 4295.