The post-US inflation selloff accelerated yesterday. All assets were heavily sold, and the money piled into the US dollar, as a sign of extreme stress in the market.
No one wants to take a chance in any asset other than the US dollar before tomorrow’s FOMC decision; even the traditional safe haven assets are suffering right now. Gold, for example, dropped $60 per ounce in a single session and the USDCHF flirted with parity, as the S&P500 ditched 3.88% and Nasdaq dived 4.68%.
Even though the US futures trade in the positive this morning, the risk sentiment is poor, and the fear of seeing the Federal Reserve (Fed) become more aggressive on its rate policy to tame inflation is omnipresent.
More importantly, we know that Jerome Powell knows that he may not avoid pushing the US economy into recession to fight inflation. The 2-10-year of the US yield curve invested yesterday for the first time since April.
What will happen now?
The Fed will start its two-day meeting in this absolutely beautiful market environment, after having a hint the recent policy tightening to tame inflation has not worked effectively so far and more needs to be done.
‘More’ means a 75bp hike in one of the next three meetings. It could be today, it could be next month, or in two months.
Looking at the market pricing, the probability of a 75bp hike at this week’s meeting was around 5% on Friday, before the inflation data fell like a bomb to the market. Then it soared to above 50% at Monday open, and now it’s around 95%.
This means that, what would be surprising in terms of market pricing would be a no 75-bp hike, and not the contrary. This is relatively good news. An eventual 75bp hike at today’s meeting would upset investors but a good part of it is certainly factored in the prices.
Yet, if the Fed decided to proceed with a 50bp hike, as planned, we could see some relief rally posterior to the decision. We don’t know on which foot the Fed will dance, but tomorrow’s decision will probably be nothing more than ripping the band aid off, unless the Fed has a further hawkish surprise in its hat.
Crypto winter
Cryptocurrencies took a severe hit on the combination of general market panic and industry-wise discomfort. Bitcoin dived below the $22K mark, confirming once again its high positive correlation with Nasdaq. Ethereum retreated below $1200 mark.
The selloff in cryptocurrencies got certainly uglier on news that Celsius, which is one of the biggest crypto lending firms, stopped withdrawals, and even transfers between accounts, due to ‘extreme market conditions’.
That’s bad. If people won’t be able to withdraw their cash when they want to, or when they need to, and especially when the market is falling this sharply, it could trigger a ‘bank run’ on cryptocurrency firms. Coinbase shares dived more than 11% yesterday and Celsius token lost some 20%.
Cryptocurrencies stand at a vulnerable place right now for two reasons. First, they act like risk assets and the fact that they have different fundamentals are not reflected in the market pricing, and the market remains heavily risk-off. And two, we start seeing some ref flags in some parts of this new market: the terra-luna’s collapse, the Coinbase warnings about ‘unsecured creditors’, and Celsius’ decision to halt activity on accounts are signs that the industry may not be ready for the storm.
