S&P 500 Correction or Asian Currency Meltdown Threatens Stability

The early onset of Sell-in-May this year coincided with a sharp downturn in Tuesday’s trading, driven by yield fluctuations, bringing April’s market activity to a close. Stocks faltered ahead of an important Federal Reserve decision, compounded by disappointment from major players in the AI sector.

In a recent communication to clients, Freya Beamish, TS Lombard’s head of macro research, raised concerns about an impending correction in the S&P 500 or the possibility of an Asian foreign exchange crisis.

Beamish highlighted the growing disparities among major economies. While China, the European Central Bank, and the Bank of England are working to counteract the Fed’s anti-inflation measures to prevent currency devaluation, the Bank of Japan is focusing on stimulating its economy by controlling interest rates, although the yen continues to struggle.

According to Beamish, pressure for currency depreciation will persist until the U.S. achieves equilibrium, with inflation ideally around 3% and sustained robust growth to support the global recovery narrative.

A significant worry is the weakening U.S. job market, evidenced by various indicators such as deteriorating hiring plans for small businesses and a notable decline in the PMI’s employment index.

While concrete data, notably the upcoming jobs report on Friday, may not yet reflect these warning signs, Beamish noted that independent surveys with a track record of predicting employment downturns are signaling trouble.

Beamish suggests that leading indicators currently point to a period of sluggishness ahead, which could unsettle markets but also prompt the Fed to intervene, leading to a swift economic rebound. However, she emphasizes that Asian currencies depend on favorable U.S. data over the next few months to avoid further pressure on policymakers.

Beamish underscores the delicate balance for Japan’s monetary policy, where misjudging U.S. inflation and job figures could result in slow rate adjustments. Additionally, she highlights the challenge for China’s PBOC in maintaining currency stability against a rising dollar, requiring positive U.S. economic indicators to mitigate strain.

In conclusion, Beamish advises caution amidst increasing economic disparities, stressing the crucial role of U.S. data in shaping global financial dynamics in the coming months.