US tech selloff sparks wider weakness

• European markets weaken after US earnings-led decline
• Risk-off sentiment fails to lift the dollar as markets look for dovish pivot at the Fed
• US data provides focus ahead of tomorrows core PCE release

European markets are deep in the red this morning, feeding off the weakness seen throughout US and Asian equities. In terms of data, we have seen yet another sign of weakness for the German economy, with the Ifo business climate figure falling to a five-month low following yesterday’s PMI decline.

Earnings season jitters have really taken hold this week, with the S&P 500 slumping 2.3% despite a third of the index remaining in the red for the session. This serves to highlight the impact felt by the surge in tech valuations which has left the index open over huge volatility in the event of a tech-led selloff. With markets in a spin after Tuesday’s Alphabet and Tesla earnings, traders will look ahead with trepidation as we approach the busiest week of the second quarter earnings season. The release of earnings from Apple, Microsoft, Amazon, and Meta over a three-day period should provide plenty of concern for traders, holding off any ‘buy-the-dip’ mentality for the time being.

The risk-off sentiment permeating through financial markets has done little to help traditional havens such as the dollar and gold, with both losing ground alongside equities. Instead, we are seeing the Japanese Yen and Swiss Franc enjoy sharp gains, with traders wary of the monetary policy implications this current selloff could have at the Federal Reserve. While the FOMC do reconvene next week, we are yet to see any particularly notable repricing towards a July rate cut from Powell & co. Instead, the events of this week have helped shift expectations for the remainder of 2024, with markets now pricing in a 68% chance that we see at least three rate cuts by year end. With only three meetings left beyond next week, the growing confidence that we will see three 2024 cuts do signal a very aggressive pivot from the Fed as we move towards the end of the year.

For today, markets will be seeking further guidance from a raft of US data points that include the second quarter GDP figure, core durable goods, and jobless claims. However, markets will also be looking out for the less followed quarterly core PCE prices figure, as we seek to gauge how tomorrows June inflation metric will look based on the wider Q2 reading. Coming off the back of a concerning 3.7% Q1 core PCE inflation reading (annualized), a sharp decline today could help strengthen claims that we will see three cuts this year.