Stocks Fall Across The Globe As Hawkish Central Banks, Washington Jitters Roil Risk

Well, the overnight action was predictable under the circumstances, but it’s nevertheless unnerving for anyone long risk at these levels.

A day after Mario Draghi took what certainly seems to have been a hawkish turn by saying the ECB would “look through” lackluster inflation data, the euro hit a 1-year high:

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“Macro accounts jumped on the euro-bull wagon while leveraged ones looked to fade any dip of a 20-25 pip width,” Europe-based traders told Bloomberg, who also notes that risk reversals show bullish euro bets reached multi-month highs versus the dollar and the yen. Amusingly, Constancio tried to walk the whole thing back, insisting that Draghi’s speech was in line with policy. “Market reactions are not always understandable,” he mused.

Meanwhile, Fedspeak about asset bubbles, elevated multiples, suppressed vol., and loose financial conditions has also spooked risk as it only adds to the sense that policymakers are set to try and scale back stimulus.

EM Asian currencies fell early with stocks, tracking the mood in U.S. equities as traders digested Yellen’s “somewhat rich” comment. “The correlation of Asian FX with positive risk appetite has been strong and so this move is not surprising,” says Mingze Wu, a currency trader at INTL FCStone in Singapore.

Despite the hawkish Fed rhetoric, the broad dollar is under pressure from Senate Republicans’ decision to push back a vote on the bill until after the July 4 recess. Additionally, Draghi’s comments suggest the policy divergence between Europe and the US might close (think rate differentials).

“ECB is no longer moving in a completely opposite direction to the Fed and that could be resulting in broader U.S. dollar weakness,” says Janu Chan, a senior economist at St. George Bank in Sydney. “The delay to the vote on the health-care bill highlights the difficulty in passing policies and raises doubts on whether President Trump can pass his stimulus and tax cut policies.”

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Oil will be under all kinds of pressure if today’s EIA data confirm the 851k bbl inventory build API reported on Tuesday afternoon.

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Crude inventories are still stubbornly high, more than 100m bbl above the 5-year seasonal average, according to EIA data. “Rallies in this market are going to be very fragile and any bad news is going to see prices sold off,” David Lennox, a resource analyst at Fat Prophets in Sydney told Bloomberg. “Investors are well aware of the abundant supply situation and we really need to see some uplift in demand to help clear that.”

Here’s SocGen’s overnight take from Kit Juckes:

A couple of notables from Europe: France’s June Consumer Confidence printed at 108 vs 103, well above estimates. And the DAX index fell as much as 0.9%, hitting its lowest since late May, after breaking below 50-DMA for first time since April 20.

Here’s a snapshot of global equities:

• Nikkei down 0.5% to 20,130.41
• Topix down 0.3% to 1,614.37
• Hang Seng Index down 0.6% to 25,683.50
• Shanghai Composite down 0.6% to 3,173.20
• Sensex down 0.4% to 30,843.25
• Australia S&P/ASX 200 up 0.7% to 5,755.70
• Kospi down 0.4% to 2,382.56
• FTSE 7433.15 -1.21 -0.02%
• DAX 12607.97 -63.05 -0.50%
• CAC 5241.55 -17.03 -0.32%
• IBEX 35 10633.70 -14.20 -0.13%