The crack in the bull market that started with the NASDAQ sell-off on Friday broadened out dramatically overnight, with many major markets shifting into reverse.

Major indices down 1% or more include the Dax, FTSE, CAC, IBEX, Hang Seng and S&P/ASX. The Nikkei, down 0.25%, has not been hit quite as hard. US index futures are also trading down sharply today, with NASDAQ futures down 1.2%, S&P futures down 0.7% and Dow futures down 0.4%.

Yesterday afternoon, the US Federal Reserve took a more hawkish stance than the street had expected. Not only did the FOMC raise interest rates as expected, the dot plot indicated the bulk of FOMC members are still looking for at least one more rate hike this year and three next year. The Fed also released its plans for normalizing its balance sheet starting later this year, by cutting reinvestments starting at $10B per month, ramping up to $50B per month over a year. The start date remains open mainly because of uncertainty over the looming late summer budget battle that could lead to a government shutdown. 

The biggest nail in the coffin of the liquidity party, however, came from Fed chair Janet Yellen, a longtime dove who didn’t ride to the rescue of the stock market this time. Early in the day some traders had speculated weaker-than-expected US inflation and poor retail sales numbers could push the Fed into a relatively dovish 'hawkish hold' stance, where they would raise rates and signal no more normalization. Janet Yellen dumped a bucket of cold water on that though, indicating the Fed sees recent weakness in inflation as a one-time event. 

Adding to the pressure on stocks, reports came out later in the day that the special investigator Mueller, who is looking into Russian impact on the 2016 US election, is starting to look into whether President Trump obstructed justice. Remember that presidents getting into trouble has been terrible for stock markets: US indices fall nearly 40% in 1974 just before President Nixon resigned and fell nearly 20% in six weeks when President Clinton was facing impeachment. 

UK markets are active this morning on the Bank of England news. Sterling is soaring and the FTSE is selling off on the news that the monetary policy committee voted 5-3 to maintain current low rates, with the number of hawkish dissenters rising to three from one, indicating that rising inflation has increased the pressure on the central bank to back away from stimulus. 

A trend away from stimulus and toward normalizing monetary policy around the world appears to be accelerating. In addition to the Fed tightening, The Bank of Canada has been talking about reducing stimulus, the ECB has been under pressure to do the same, and now the Bank of England is feeling the heat. Also, overnight AUD has been rallying on the heels of a second very strong Australian employment report. This indicates that recent Bank of Canada comments about the adjustment to lower commodity prices being complete and the drag of price plunges fading applies to other resource economies as well. 

There is more news on the way for traders to potentially react to including US industrial production and Empire manufacturing this morning and a Bank of Japan decision tonight. 

Corporate news

There have been no major corporate developments this morning. 

Economic news

Bank of England decision    0.25% & £435B no change expected
Swiss National Bank decision    (0.75%) no change as expected

UK retail sales            0.9% vs street 1.6% vs previous 4.0%
UK retail ex auto        0.6% vs street 1.9% vs previous 4.5%

Australia employment change    42K vs street 10K 
Australia unemployment rate    5.5% vs street 5.7%

NZ GDP            2.5% vs street 2.7%

US FOMC economic and interest rate projections:

GDP                  raised to 2.2% from 2.1%

Unemployment rate    cut to 4.3% from 4.5%

Core PCE inflation      cut to 1.7% from 1.9%

Dot Plot remainder of 2017

Hold rest of year          4 members

One more hike              8 members

 Two more hikes          4 members

Upcoming significant economic announcements:

8:30 am EDT        Canada manufacturing sales    street 0.9%

8:30 am EDT        US Empire manufacturing    street 5.0
8:30 am EDT        US Philadelphia Fed        street 25.0 vs previous 38.8
8:30 am EDT        US jobless claims        street 241K

9:15 am EDT        US industrial production        street 0.2% vs previous 1.0%
9:15 am EDT        US manufacturing production    street 0.1% vs previous 1.0%

10:30 am EDT        US natural gas storage        street 90 BCF


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