Global financial markets were roiled on Tuesday, with stocks and currencies swinging wildly as investors braced for a slew of major economic data releases, corporate earnings reports, and a pivotal Federal Reserve policy meeting in the coming days.
After six straight months of gains, global equity markets are poised to end April in the red, reflecting escalating anxiety on Wall Street and other bourses about the trajectory of the world economy. The MSCI All-World index, a broad benchmark spanning developed and emerging markets, was up a modest 0.1% on the day but headed for a 2.2% monthly decline – its worst performance since October.
The selling pressure has been fueled by lingering uncertainty over whether the Federal Reserve and other major central banks will be able to tame stubbornly high inflation without tipping their economies into recession. Investors are anxiously awaiting fresh signals from the Fed when it concludes a two-day policy meeting on Wednesday.
“Inflation will be the judge and jury of what the Fed does,” said Samy Chaar, an economist at Lombard Odier. “Either you believe that inflation fundamentals advocate for a structural rebound, or more likely, the first quarter was a setback and things are going to get back into a disinflationary landing mode. That second scenario is my base case right now.”
Markets have been whipsawed in recent months by conflicting economic data, with some reports pointing to resilient growth and continued pricing pressures, while others suggest the Fed’s aggressive interest rate increases over the past year are beginning to take a toll. As of Tuesday, traders were pricing in just a 57% probability of another rate hike from the Fed at its September meeting, down from expectations of over 150 basis points of increases as recently as January, according to CME Group’s FedWatch tool.
The shifting outlook on U.S. monetary policy has whiplashed currency markets, with the Japanese yen experiencing an exceptionally wild ride. On Monday, the yen soared as much as 3% against the U.S. dollar in a matter of minutes amid speculation that Japanese authorities had intervened to support the battered currency. At one point, the dollar plunged below 148 yen after trading above 160 yen earlier in the session – a massive move for a currency pair involving two of the world’s most heavily traded currencies.
While Japan’s vice finance minister Masato Kanda did not confirm the intervention directly, he told reporters on Tuesday that officials were “ready 24 hours” to take action in currency markets as needed – a strong hint that Tokyo had indeed stepped in.
The yen’s sudden surge underscored the immense strain the currency has been under this year, plunging over 10% against the dollar as the gap between rising U.S. interest rates and Japan’s ultra-low yields has funneled investment flows out of yen and into higher-yielding dollar-based assets.
“A lot now hinges on the outcome of the Fed policy meeting this week,” said Vasu Menon, managing director at OCBC Bank. “Intervention alone cannot narrow the gap in interest rates that is largely driving the yen’s decline.”
By Tuesday, the yen was already backpedaling, with the dollar rising 0.35% to 156.87 per dollar as traders questioned whether Tokyo’s apparent intervention could have a lasting impact without a broader shift in monetary policy stances.
Across global markets, a similar tension was playing out between shifting economic realities and the policy response from central banks. In Europe, investors digested a barrage of major earnings reports, with banking giants HSBC and Santander as well as consumer brands like Adidas and Lufthansa unveiling their latest quarterly financials.
In the U.S., all eyes were on Apple, set to report earnings after the bell amid questions over how resilient consumer demand for its iconic products will prove in the face of higher borrowing costs and elevated inflation eating into household budgets.
The coming days will bring even more potentially market-moving catalysts, with the closely watched U.S. jobs report for April due on Friday, offering the latest temperature check on the all-important labor market. Throughout the week, dozens of other S&P 500 components from Ford to Pfizer will make their quarterly numbers public.
With so many cross-currents in play, financial markets seem primed for further volatility as the tug-of-war between economic reality and central bank policy responses plays out in real time. For investors, the only certainty is that April’s turbulence is unlikely to be the last of 2023.
