Australian dollar destroyed as global recession fears mount

Markets are finally working it out. There’s a global recession coming. DXY to the moon and, in my view, it’s going to take out a twenty-year high:

AUD was pulversmashed as risk let go:

Oil fell and the chart looks bad with bearish descending triangle forming:

Metals are still smoking Goldman crack. Massive downside possible here as loose hands puke the commodity hoard:

Big miners were slain:

EM stocks are all you need to know:

As the junk trapdoor opens:

And China delivers the bearish coup de grace as CNY goes overboard, which could not be more negative for EM and commodities:

The Treasury curve was belted:

And stocks were a bath of blood:

In conclusion, every leading indicator that I track for risk is flashing red simultaneously.

Yet markets are still priced for a soft landing. S&P500 NTM is 19x and that’s assuming earnings growth. What’s ahead is an earnings recession.

China is already there as the property crash and OMICRON ravage the economy. Europe is headed there in short order as the war and energy shock rock confidence. The US is the last man standing but its rates shock is exploding as markets mull 50bps and 75bps hikes. Nomura is typical:

We expect 75bp hikes at the June and July FOMC meetings after 50bp in MayWe believe momentum for a 75bp rate hike at some point later this year has increased; we now expect a 75bp hike at both the June and July FOMC meetings, following a widely expected 50bp hike in the May meeting.FOMC participants appeared to open the door to such action this week. Over the near term, the Fed remains squarely focused on bringing rates to a neutral setting. Even dovish participants like Evans and Daly have recently suggested support for bringing rates to around 2.25-2.50%, which they consider to be neutral.

Hikes of 50bp in May and 75bp in both June and July would bring rates to the FOMC’sperceived neutral setting very quickly (2.25-2.50%). Note the median long-term dot is currently 2.375%, with one participant at 2.00%, six at 2.25%, one at 2.375%, five at2.50% and two at 3.00%. We believe most participants at the 2.25% level would be comfortable with 2.25-2.50% as neutral.For some time, our view has been that if the Fed could hike 200bp at one meeting without significantly affecting market functioning, they would. So far, markets have been reluctant to price 75bp hikes, but stronger pricing for such a move would likely ease the path for the FOMC and participants could likely forge a consensus on such action quickly.

We believe comments from FOMC participants this week were an intentional effort to “trial balloon” a 75bp hike and then closely monitor the market’s response. Moreover, ChairPowell acknowledged today he supports frontloading rate hikes. Markets have responded,but not in a way the Fed would consider “disorderly.” From the Fed’s perspective, hiking multiple times by 75bp would bring them to neutral more quickly.

The level does not matter as much as the rate of change. I continue to think that markets will blow up, with stocks crashing and a credit event, long before the Fed gets this far. That will strangle financial conditions and growth faster than the Fed expects.

Nonetheless, the Fed “put” is much lower than it was before COVID and it will also need to completely pop Wall Street’s absurd commodities bubble if it is serious about ending this little inflation episode.

In short, everything is going lower.

Especially AUD.