The collapse of risk appetite continued today with selling across the board. Global equity indices, crude, USD and bond yields are all weaker. The Shanghai composite fell 5.22% and the Nikkei declined 3.89%. There is indiscriminate selling, rather than a traditional risk-off trade. Perhaps the clearest signal of a risk aversion trade is the decline of USD/JPY, which had recently reconnected with interest-rate differentials but now decoupled.
Expectations of higher US inflation is the likely cause. This, plus strong growth, will push the Fed interest rate path higher. The Fed Fund rate remains under-priced compared to “dots.” Repricing of the US yield curves has equity investors concerned that dot yields and stocks historically don’t move in tandem. Not helping is US President Trump’s statement blaming the Fed for the sell-off. "The Fed is making a mistake," Trump told media, after the markets posted their biggest pullback in more than seven months. "I think the Fed has fallen on its head." Markets are clear that an independent central bank is critical to overall market stability.
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