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Concerns over recession resurface
US dollar rises as a safe haven asset.
“Concerns over recession resurface but US dollar still rises”
US dollar rises as a safe haven asset. Yesterday, the US dollar rose against other major currencies except for the yen due to an inflow of safe haven assets. However, the US dollar is currently showing a downward trend.
In fact, despite positive economic data and headlines suggesting a strong US economy, the US dollar has continued to rise.
Moreover, after First Republic Bank announced an outflow of deposits of over $100 billion, the stock market dropped to a record low, indicating growing concerns of a recession due to disappointing earnings reports.
In addition, the market was reminded of the serious impact of a banking crisis not only on stocks, but also on government bond yields, as Santander Bank of Spain warned of a slowdown in the mortgage market.
The difference between the US dollar and US bond yields proves that the US dollar is benefiting from a risk off environment, rather than positive economic data or Federal Reserve Bank (FRB) rate hike expectations.
A rate hike of 0.25% is almost certain at the next FRB meeting, but the market is currently pricing in a total rate cut of over 0.5% by December, with further cuts expected next year.
ECB’s hawkish stance supports the euro On the other hand, the European Central Bank (ECB) is expected to raise rates by 0.25% three more times this year, with no rate cuts expected. 30% of the market is currently supporting a rate hike of 0.5% at next week’s ECB meeting.
Unlike other central banks, the ECB is expected to continue raising rates, supporting the euro and maintaining its upward trend.
Other central banks that are not expected to cut rates this year are the Bank of England and the Swiss National Bank.
While the US dollar is attracting safe haven flows, there is still the possibility of further decline in the euro and dollar exchange rate, but a significant turning point is unlikely at this time.
The gap in policies between the FRB and ECB has attracted bullish investors, but there is also the possibility of a rebound to around 1.1070.
If this zone is breached, the upward trend may expand to around 1.1175, the high of May 31st.
Stock prices decline due to risk aversion Yesterday, all three major US indices fell by over 1%.
Particularly, the NASDAQ, which has many high tech stocks, fell sharply by 2.32%, marking the largest decline since March 9th.
Due to increasing concerns about a recession, some investors may have abandoned risk assets such as stocks.
However, overall, the stock market situation is far from bearish.
Liquidity and expectations of an interest rate cut by the Federal Reserve support the indices, and despite yesterday’s decline, the SP500 remains around the key resistance zone of 4150.
The futures market is indicating a high opening today due to strong earnings reports from Microsoft and Alphabet.
Valuations indicate that many stocks are still overvalued, but leading companies in the US stock market are high growth technology companies evaluated based on expected cash flows for the next few quarters and years.
As a result, some earnings and estimates are expected to be strong, and the present value may continue to rise due to expectations of an interest rate cut by the Federal Reserve.
This trend may be attractive to investors, and even if the stock index declines, the strong performance of high growth companies may limit losses.
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