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Darkened economic outlook and higher rate prospects sink Wall Street

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Both US and EU markets tumbled on Thursday after a slew of central banks, including the Fed, ECB, BOE, and SNB’s 50 bps rate hike, along with their hawkish guidance. The weaker-than-expected November US and China economic data have also added to the pessimism about the global economic outlook, with China’s retail sales sinking 5.9% year on year and the US retail sales contracted by 0.6% from the prior month.

Following the Federal Reserve Bank, the European Central Bank has also slowed its rate hike to 50 bps and brought its deposit rate to 2%, but it indicated to further raising rates to tackle the hefty inflation. While the bank lifted its outlook for inflation in 2023, it ruled out a plan to start unwinding its €5 trillion balance sheet from March 2023. The surprisingly hawkish iteration sent major EU indices down, with the Euro Stoxx 50 sinking 3.5%.

While risk-off trades again prevailed in the broad markets, the US dollar index strengthened the most in the last two months, sending commodity prices down, along with a slump in the equity markets, dashing hopes for a Christmas Rally.

  • Nasdaq tumbled more than 3% as an expectation for higher rates slashed the valuation of growth stocks.  All the 11 sectors in the S&P 500 finished lower, with Technology and Communication Services leading losses, both down nearly 4%. Energy was the only sector that fell less than 1% as it looks like the oil markets again picked on the upside pace amid the inflation-driven economic downturn.
  • Tesla shares stabilised at the year-low level of just under 158 after a disclosure that CEO Elon Musk sold another $3.58 billion worth of Tesla shares, which is believed to relate to its Twitter financing situation. The total amount of Tesla shares that Elon has offloaded since last year reached $40 billion.
  • Pound slumped 2% against the US dollar after the BOE’s 50 bps rate hike and expressed concerns about the economic outlook. Markets seem to expect the terminal rate of the BOE to be lower than previously projected as the yield on the UK 10-year gilt fell 7 bps to 3.23%, in contrast to a jump in all the EU members’ government yields, where the Italian 10-year bond yield surged by 29 bps, to 4.14%.    
  • The Australian dollar sharply declined against the greenback due to a jump in the USD and a drop in base metal prices due to China’s weak economic data. The RBA’s dovish stance also pressed on its currency.  AUD/USD dropped 2.4%, to just under 0.67 at AEST 8:20 am.
  • Gold futures slashed $32 per ounce and pulled back below 1,800 and the 200-day MA again as the US dollar jumped. The precious metal may be approaching its 100-day MA at 1,720 from a technical perspective.  
  • Asian equity markets are set to open lower amid the broad risk-off sentiment. ASX futures were down 1.16%, Nikkei 225 futures fell 1.25% and Hang Seng Index futures slipped 0.54%. Both the Chinese Yuan and Japanese Yen slumped against the USD, with USD/CNH and USD/JPY rebounding back to close to the key resistance of 7 and 137.85, respectively. 

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