Stocks Fall Sharply on Debt Ceiling Fears & Fed Hawkishness

Stock markets came under heavy selling pressure yesterday as traders grappled with increasing uncertainty ahead of the looming debt ceiling negotiations. With talks set to continue into next week, markets are clearly fearful that a default might actually happen, despite being seen as the outside scenario. The DAX and FTSE both saw heavy losses yesterday with the indexes experiencing their largest one-day losses since March. Treasury Secretary Yellen repeated her message yesterday that June 1^st is the deadline for negotiations though did note there was some wiggle room. Consequently, the fear is that negotiations go right down to the wire, fuelling further uncertainty and weakness in markets.

USD Rallies as June Rate Hike Chances Grow

The US Dollar was seen soaring higher yesterday as the minutes from the latest FOMC minute leaned to the hawkish side. While the debate was well split over whether to tighten further in June, the tone of discussions seemed to lean more towards a further hike. Additionally, with the inflation forecast raised for the year, most members agreed that rates would need to stay at higher levels for longer. Given the hawkish tone we’ve heard from several Fed members recently, the chances of a June hike look to have increased.

Gold and silver prices were seen falling lower yesterday amidst the uptick in USD. Gold has been stuck in a block of consolidation recently with price currently testing lows while silver was seen breaking down to fresh lows on the month, now down around 12% from the YTD highs.

Crypto assets have been under pressure too with fresh strength in the Dollar weighing on Bitcoin prices. BTC futures turned heavily lower yesterday and are now testing the May lows. If we see any further move higher in USD into the end of the week this will no doubt drag BTC lower near-term.

In FX, USD has been the strongest performer so far today. Across today’s session the main focus will be on the latest set of advanced US GDP results. Given recession concerns and the uncertainty over a potential Fed rate hike, today’s data holds the power to create plenty of volatility in USD as well as across equities and commodities markets. Unemployment claims will also be on watch ahead of next week’s headline NFP data.