Stocks tumble on heightened inflation concerns
US stocks crater as Fed policy jitters rock trading. European gas prices rise as lower renewable output boosts demand. China plans policies to rescue growth, support tech firms Oil sheds most of its ...
Chief Investment Office6 May 2022
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Stocks plunged with Treasuries in a violent reversal from the reaction to the Federal Reserve decision as traders worried that officials could struggle to fight inflation amid the threat of a recession.

Just a day after notching the biggest rally in two years, the S&P 500 tumbled, with more than 95% of its companies moving lower. In a sign of just how volatile markets have been amid the Fed’s tightening campaign, the 3.6% rout was only the worst since Friday. The Nasdaq 100 suffered one of its sharpest U-turns ever. The tech benchmark plunged about 5%, wiping out its post-Fed gains. A selloff in long-end Treasuries pushed the 10Y yield above 3%. The dollar climbed.

Doubts that policymakers can arrest runaway prices rocked markets, with the prospect of stagflation unsettling investors. By pushing back on a jumbo hike of 75 bps in June, Fed Chair Jerome Powell beat back traders’ most aggressive predictions. However, it is still a bumpy road ahead, with pivotal economic data and global developments that could seed doubts about the central bank’s approach. Friday’s (6 May) jobs report is expected to show solid payroll growth and wages holding at exceptionally high levels – remaining an enduring source of inflationary pressures.

The swing higher in longer-dated yields certainly matters for the broader economic picture as they influence borrowing costs. Mortgage rates in the US resumed their upward jump, reaching the highest level since August 2009. Separate data Thursday showed that productivity dropped in the first quarter by the most since 1947 as the economy shrank, while labour costs surged and illustrated an extremely tight job market.

The S&P 500 Index plunged 3.56% to 4,146.87, the Dow Jones Industrial Average declined 3.12% to 32,997.97, and the Nasdaq Composite Index shed 4.99% to 12,317.69.



European natural gas gained as lower renewables generation boosts demand for the fuel, while traders continue to grapple with the impact of proposed European Union (EU) sanctions on Russian oil.

Benchmark futures rose as much as 3.8% in a third day of gains. German wind power slumped, according to data from the European Energy Exchange, and output is forecast to remain curbed rest of the week. In the UK, demand for gas for power generation has remained elevated since the end of April.

The EU on Wednesday (4 May) proposed phasing out Russian crude and oil product purchases this year, potentially boosting demand for gas and coal for energy. It brings more risk for the market after Moscow halted direct flows to Poland and Bulgaria last week for failing to meet its demand to be paid in rubles.

More nations face payment deadlines in the coming weeks. The EU has said buyers opening rubles accounts with Gazprombank to pay for supplies would breach the bloc’s sanctions on Moscow.

Meanwhile, Norwegian gas supplies to Europe slipped from the day earlier. Supplies of Russian gas via Ukraine remain steady, while Poland is receiving gas in reverse mode from Germany.

Benchmark gas futures for delivery next month were 1.4% higher at EUR105.30 a megawatt-hour at 4:21 p.m. in Amsterdam, while the UK equivalent contract rose 3.9%. German power for next year and coal prices also increased.   – Bloomberg News.

The Stoxx Europe 600 declined 0.70% to 438.26.



Prime Minister Fumio Kishida said he would loosen Japan’s virus-related border controls in line with other wealthy democracies next month, as he sought to boost consumer spending to fight an economic slowdown.

Kishida credited the border controls with helping the country weather the pandemic relatively well, even as he announced their relaxation Thursday (5 May) in a speech in the City of London. The premier told an audience at Guildhall that Japan would be as accessible as other G-7 countries by next month, when leaders of the bloc are due to meet in Germany.

“We will further relax controls, so that in June it will be possible to enter the country as smoothly as other G-7 nations,” said Kishida, who was on the last leg of a tour that also took him to Indonesia, Thailand, Vietnam, and Italy.

In a later press conference, he added a note of caution, saying that the changes would be implemented in stages, based on the advice of experts.

More broadly, Kishida pledged to pursue policies that fuel strong economic growth, in remarks that appeared aimed at easing investor concern about his “New Capitalism” plans.

“I will continue to listen carefully to the markets, to those on the ground, and press ahead with policies,” he said.

He said he would encourage citizens to switch to investment from savings, significantly expanding the Nippon Individual Savings Account system, and adding other policies with the aim of doubling income from assets. Japan has trailed the US in growing household financial assets, Kishida said.

Border easing would be welcomed by Japan’s tourism industry, which has been urging the government to allow in more overseas visitors to take advantage of the weakening yen. Until the pandemic, tourism was a rare bright spot for Japan’s economy as the number of foreign visitors expanded five-fold between 2011-19. – Bloomberg News.

The Nikkei 225 Index was 0.79% higher at 26,607.50 on Friday (6 May) morning.



China may soon reveal more policies intended to rescue the economy after top leaders vowed to meet growth targets without compromising on the country’s stringent Covid Zero strategy.

Actions to promote investment, shore up exports, and support technology platform companies are all on the table, state media outlets reported Thursday (5 May). The People’s Bank of China (PBOC) also said late Wednesday it would conduct “normalised financial supervision” over online platforms, echoing language used last week by the Communist Party’s Politburo, the top decision-making body.

The State Administration of Foreign Exchange on Thursday vowed to deepen reform, too, by promoting cross-border financing and investment – both to encourage the flow of more foreign capital into China, and to spur domestic firms to go global. The foreign exchange regulator also pledged in its statement to prevent and resolve any external shocks and risks to safeguard a stable foreign exchange market.

The media reports and government agency statements come days after the Politburo issued its sweeping pledge to support the economy, which is in the throes of the country’s worst coronavirus outbreak since 2020. Authorities deployed strict lockdowns in places like Shanghai and Jilin province to contain infections, measures that have pummelled factory activity and consumer spending, imperilling the government’s growth target of about 5.5% for the year.

The state media reports do not contain much detail about specific actions, which are likely to come from various government departments and agencies over coming weeks. However, some of the highlights from the reports include support for technology platform businesses, possible easing of real estate curbs and a boost in fiscal spending. – Bloomberg News.

The Shanghai Composite Index climbed 0.68% to 3,067.76 on Thursday. The Hang Seng Index dipped 0.36% to 20,793.40.



Fears of runaway inflation are sweeping across emerging Asia, with bond traders betting that central banks will have to act to stamp out growing price pressures.

Thai rate swaps and bond yields jumped Thursday (5 May) after a report showed that the nation’s core inflation rate held at a 10-year high in April. Faster-than-expected consumer price gains fuelled a surge in short end Philippine yields while benchmark Indian rates extended a rise triggered by a surprise rate hike on Wednesday.

The moves are telegraphing concerns that Asian central banks may have fallen behind the curve in addressing soaring price pressures as the war in Ukraine and China’s Covid curbs drive global prices higher. Thailand’s monetary authority has said it can look past short-term price pressures while its Philippine counterpart has been on hold for the past year.

“Market participants are signalling that they don’t believe that the Bank of Thailand (BOT) will maintain the policy rate at 0.5% this year, with the 2Y Thai yield signalling that the first quarter-percentage-point hike should arrive in the second half,” said a strategist.

Traders are betting that the BOT will have to raise rates in the coming months as a recent increase in fuel prices translates into quicker inflation. The premium on two-year non-deliverable interest rate swaps over the policy rate has widened to 138 bps, the highest in more than a decade.

Over in the Philippines, 2Y sovereign bond yields jumped 13 bps after a report showed consumer prices climbed at the fastest pace in over three years in April. Supply disruptions may fuel inflationary pressures, and warrant “closer monitoring to enable timely intervention in order to arrest potential second-round effects”, central bank Governor Benjamin Diokno said after the data was released.

Traders are also not ruling out a further increase in India’s borrowing costs after the central bank’s out-of-the-cycle rate hike on Wednesday. Yields on 10Y government bonds climbed as much as 7 bps on Thursday after ending 26 bps higher the previous day.

Persistent price pressures are becoming more acute, particularly on food, Governor Shaktikanta Das said Wednesday, adding that there is a risk prices stay at this level for “too long” and expectations become unanchored. – Bloomberg News.

The S&P/ASX 200 Index was 2.05% lower at 7,215.40 on Friday morning, reversing a 0.85% climb to 7,366.70 the previous session.

South Korea’s Kospi Index fell 1.24% to 2,644.49 in early Friday trading. Markets were closed on 5 May for Children’s Day.

The Taiwan Stock Exchange Weighted Index rose 0.79% to 16,696.12.



Oil pared most of its gains as a rising dollar and weakness in broader financial markets outweighed news that the US administration will lay out plans soon to replenish its strategic reserves.

West Texas Intermediate (WTI) was trading almost flat after gaining as much as 3.3% as the dollar gained and equities markets extended losses with concerns over an economic recession resurfacing. The Biden administration is announcing a plan Thursday (5 May) to begin purchasing oil to refill the nation’s emergency reserve, according to a person familiar with the matter.

Oil has surged more than 40% this year as the war disrupted flows, inflation picked up, and central banks – including the US Federal Reserve – started tightening policy. The dollar was higher Thursday, posing a headwind to crude, after the Fed hiked interest rates by the most since 2000. Also limiting oil’s gains were comments from the International Energy Agency’s Executive Director Fatih Birol about members being in a position to release more oil stockpiles if needed.

The European Union (EU) said this week it will ban Russian crude over the next six months and refined fuels by year’s end to increase pressure on President Vladimir Putin over his invasion of Ukraine. The bloc also is targeting insurers in a move that could dramatically impair Moscow’s ability to ship oil around the world.

WTI for June delivery rose 0.45% to USD108.26 a barrel in New York. Brent for June settlement closed up 0.69% to USD110.90 a barrel.

At present, Russia’s oil exports are running at a record pace as Moscow manages to reroute cargoes previously sent to the US and elsewhere to alternative buyers, especially in Asia, according to the note.

The EU aims to conclude the sanctions package by the end of the week (ending 6 May), or 9 May at the latest, according to diplomats. To get the curbs over the line, the bloc needs to address concerns from Hungary and Slovakia on phaseout timing, and queries from Greece on banning transport of oil between third countries.

The Organisation of the Petroleum Exporting Countries (OPEC) and its allies will nominally increase production by 432,000 barrels a day in June. However, OPEC only managed an increase of just 10,000 barrels a day in April, indicating the difficulty the group is having in lifting output in line with its plan.

Oil markets remain in backwardation, a bullish pattern marked by near-term prices trading above longer-dated ones. Among key differentials, the spread between Brent’s two nearest December contracts was above USD13.00 a barrel Thursday. That is more than triple the gap at the start of the year. – Bloomberg News.




Developing Asian currencies rallied Thursday (5 May) as investors piled into riskier assets after the Federal Reserve damped bets for a super-sized rate hike.

Thailand’s baht surged as much as 1% to lead the gains, as the dollar tumbled after Fed Chair Jerome Powell dismissed the idea of a 75 bps increase to cool price pressures. Malaysia’s ringgit rose 0.5%, while the Indian rupee and Philippine peso each climbed at least 0.3%.

The moves mark a reprieve for regional currencies after expectations of aggressive US rate increases fuelled a bout of strength in the greenback. But some analysts say the rally may soon fade as China’s Covid curbs weigh on the global economy and the Fed presses ahead with more policy tightening.

“This is an opportunistic time to reverse the recent weakness in Asian currencies,” said an Asia rates strategist. “We expect a temporary reversal, lasting a couple of weeks. However, souring risk sentiment as the Fed continues to raise rates will continue to weigh on EM currencies in the longer term”.

The Bloomberg Dollar Spot Index suffered its biggest one-day loss since 9 March on Wednesday after Powell turned out to be less hawkish than some traders had expected. The move propelled the Russian ruble to a gain of 7% while the South African rand strengthened more than 2%.

A jumbo-sized US rate increase may narrow the yield premium that Emerging Market (EM) currencies enjoy and spur outflows. While some developing central banks have started to withdraw stimulus, most are tightening at a more measured pace than the Fed.

But some analysts are more optimistic.

“Should US inflation start to moderate lower through the rest of the year, the Fed will have some ammunition to tone down on their hawkishness,” said a global market strategist. “A weaker dollar trajectory going forward can also help enhance international equity returns, specifically the Asia ex-Japan region”. – Bloomberg News.

On Thursday (5 May), the US Dollar Index upped 1.14% to 103.752, the euro fell 0.75% to USD1.0542, the pound lost 2.13% to USD1.2362, and the yen weakened 0.86% to 130.20 per dollar.


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