The flight from risk assets becomes more apparent on growing concerns about global slowdown and even recession, in particular, markets appear to be pricing in that the US economy will not be able to carry out soft landing (lowering inflation while maintaining positive GDP growth) that the Fed pledged to deliver in spite of aggressive tightening cycle, which led to textbook reactions in various asset classes: stock prices fell, bonds, as safe-haven instruments, rose in price, and the dollar fell, as foreign investors apparently reduced their exposure in US papers.

The magnitude of collapse in US equity markets on Wednesday (the worst in two years), which saw S&P 500 falling by 4% and Nasdaq erasing 5% from its market cap ensured proliferation of bearish momentum to Thursday trading. SPX futures broke below another key threshold of 3900, European indices suffered losses by an average of 2%. Further events are likely to unfold according to the classic scenario: the Fed will bend at some stage of equity sell-off, soften the rhetoric, which will become the main signal for a reversal. But given that most FOMC officials, including Powell, use the word "committed" in their comments regarding the short-term future of the policy, it may take quite a while for markets to see a welcomed policy shift.

The speed and the magnitude of equity markets downside should also imply there are concerns about potential downbeat surprises in corporate earnings and firms’ forward guidance, which, in principle, have already started to materialize. For example, $200bn Cisco released “shocking” earnings report yesterday that fell short of expectations in many respects (including forecast of negative growth in revenue in 4Q against expectations of positive growth), which led to a price drop of 20%:

The situation with covid in China remains controversial, while Shanghai gradually lifts lockdowns, an increase in the number of new cases in Beijing and Tianjin indicates a high risk of new social restrictions in these cities. In particular, a lockdown in Tianjin, a major port city in China, is a major risk for the markets, as it could exacerbate supply chain disruptions, which are well-known for their inflation effects in the countries which import China goods. As the positive trend in the reopening of Chinese economy started to show cracks oil prices were hit hard erasing 8.5% since Wednesday afternoon.

The decline in oil prices and reduced investment demand for the dollar allowed EURUSD to reclaim 1.05 level. Minutes of the ECB meeting are due today, which may offer additional support to the battered Euro as based on the comments of ECB officials, the commitment to fight inflation is gaining broad support in the Governing Council, which is likely to be reflected in the Minutes today. EU money markets price in 100 bp rate hikes from the ECB this year, respectively, the ECB should soon begin to actively catch up with expectations, otherwise the Euro may quickly cede ground to the dollar as monetary policy gap will set to widen again.

The rebound in demand for safe-heavens is not yet so clear, but is already visible in gold, given that we are at an early stage of factoring in recession expectations, the upside potential for gold prices, provided recession expectations take roots, is high. From the viewpoint of technical analysis, the price of gold has been in a well-formed bearish corridor since mid-April, while on May 16 we saw the first signs of a bull market. A breakout of the upper bound of the corridor (~1835-1840 dollars per ounce) could trigger extension of the rally: