Markets
US equities were stronger Wednesday, S&P up 2.2%, Europe’s Stoxx600 up 3.1%. The US curve flattened, US 10-yr yields up 3bps, 2yrs up 8bps as Fed dots lean hawkish. Oil was down 2.1%. So clearly, cease-fire trades are the rage.The FOMC was interpreted as hawkish, but expectations ran high for that scenario. Perhaps getting the event out of the way without a significant shock was enough to keep risk supported and, potentially, USD on the back foot.
Risk assets could be interpreting this arguably as “too aggressive.” I think it’s too early to panic on that front. 25bp is not a dramatic initial tightening, and per the statement, the Fed maintains its flexibility. The last thing the Fed wanted to do was to err on the side of caution, which would have crushed their credibility.
Markets seemed satisfied with Chair Powell’s performance today as NASDAQ fully recovered the drawdown after the FOMC statement and was now eyeing intraday highs. The 5yr yield was back to 2.17% pre-FOMC level.
EURUSD rallied into the close. My initial interpretation of the FX price action was a possible mechanical reaction to "risk-on" and short-covering before Europe and Asia hit the ground running.
But, I think the Fed’s hawkish tone was pushing away worries of the Fed behind the curve and inflation out of control. And stock markets like that.
Still, the objective side of my trading screen was flashing warning signs with the Fed swinging from one extreme to the other with Powell’s whole communication pointed to overheating. So while the Fed’s aim was a soft landing, this was the policy for a hard slowdown.
And don’t think you are out of the ADR frying pan just yet. Amid a 39% rebound of KraneShares CSI China Internet ETF (NYSE:KWEB), Sens. Marco Rubio and Chris Van Hollen reiterated that Chinese companies must fully comply with American rules to keep trading on New York exchanges.
Oil
Oil prices wee lower due to the rise in US inventories.
Brent slipped below $100/bbl for the first time in 2 weeks as talks between Russia and Ukraine continued. Reuters also reported signs of progress around the Iran nuclear deal after Russian Foreign Minister Sergey Lavrov said that Russia had received guarantees from the US regarding trade with Iran. Trading remained particularly volatile amid the uncertainty, and prices were bouncing to and fro overnight after >$13/bbl since the start of the week.
Last week I suggested everything happens at warp speed these days and extrapolated that demand destruction would set in quickly. A one-off build in US inventories should not be interpreted as demand destruction, but at minimum, it will assuage concerns about tight US supply for a bit.
Oil trading remains somewhat sticky. Despite the evident relief on the back of the latest headlines suggesting Ukraine and Russia were inching towards a peace plan, with gains in stocks and the losses in fixed income, oil was broadly unchanged (sure prices were a bit lower, but what’s a $3 drop- among oil trading friends these days). It might be a belief that even if the war does end, sanctions on Russia will likely persist, making oil supplies tougher to source for longer.
Gold
Gold survived a hawkish FOMC on recession fears. I think gold was taking its cue from the inverted yield curve.A historical look back at the 5s10s, which are now inverted, shows the last two times this happened (or was close to happening) was Y2K and right before the Global Financial Crisis. This happened post FOMC in the face of equities over 100bp higher and the USD getting hit through Powell’s presser.I think the inversion resulted from investors buying longer-term TIPS to offset that inflation risk; hence, the 10y Treasury yields fell mechanically. I don’t consider it a sign of recession but a reflection of inflation haven assets not performing as expected, so TIPS were perceived as a more reliable bet.
Still, the primary tool for tightening financial conditions was the real curve, and I continued to see real rates moving significantly higher through 2022; hence higher reals should limit gold top side ambitions as the hawkish Fed should open the door to every central bank to keep the pedal to the metal and fight inflation.
Forex
Eur
Today’s currency markets have a mechanical propensity to chase risk, so I’m not putting a lot of faith in the post FOMC bounce on the EUR/USD. That said, the hawkish Fed did open the door to a more hawkish ECB iteration and as we have seen in past episodes where the markets price out NIRP, the euro flies.
And since cease-fire trades have become increasingly popular, particularly in the energy market, I think the EUR/USD could hold a bid. Lower energy prices are good for the EU economy hence the euro.
Risk assets could be interpreting this arguably as “too aggressive.” I think it’s too early to panic on that front. 25bp is not a dramatic initial tightening, and per the statement, the Fed maintains its flexibility. The last thing the Fed wanted to do was to err on the side of caution, which would have crushed their credibility.
Markets seemed satisfied with Chair Powell’s performance today as NASDAQ fully recovered the drawdown after the FOMC statement and was now eyeing intraday highs. The 5yr yield was back to 2.17% pre-FOMC level.
EURUSD rallied into the close. My initial interpretation of the FX price action was a possible mechanical reaction to "risk-on" and short-covering before Europe and Asia hit the ground running.
But, I think the Fed’s hawkish tone was pushing away worries of the Fed behind the curve and inflation out of control. And stock markets like that.
Still, the objective side of my trading screen was flashing warning signs with the Fed swinging from one extreme to the other with Powell’s whole communication pointed to overheating. So while the Fed’s aim was a soft landing, this was the policy for a hard slowdown.
And don’t think you are out of the ADR frying pan just yet. Amid a 39% rebound of KraneShares CSI China Internet ETF (NYSE:KWEB), Sens. Marco Rubio and Chris Van Hollen reiterated that Chinese companies must fully comply with American rules to keep trading on New York exchanges.
Oil
Oil prices wee lower due to the rise in US inventories.
Brent slipped below $100/bbl for the first time in 2 weeks as talks between Russia and Ukraine continued. Reuters also reported signs of progress around the Iran nuclear deal after Russian Foreign Minister Sergey Lavrov said that Russia had received guarantees from the US regarding trade with Iran. Trading remained particularly volatile amid the uncertainty, and prices were bouncing to and fro overnight after >$13/bbl since the start of the week.
Last week I suggested everything happens at warp speed these days and extrapolated that demand destruction would set in quickly. A one-off build in US inventories should not be interpreted as demand destruction, but at minimum, it will assuage concerns about tight US supply for a bit.
Oil trading remains somewhat sticky. Despite the evident relief on the back of the latest headlines suggesting Ukraine and Russia were inching towards a peace plan, with gains in stocks and the losses in fixed income, oil was broadly unchanged (sure prices were a bit lower, but what’s a $3 drop- among oil trading friends these days). It might be a belief that even if the war does end, sanctions on Russia will likely persist, making oil supplies tougher to source for longer.
Gold
Gold survived a hawkish FOMC on recession fears. I think gold was taking its cue from the inverted yield curve.A historical look back at the 5s10s, which are now inverted, shows the last two times this happened (or was close to happening) was Y2K and right before the Global Financial Crisis. This happened post FOMC in the face of equities over 100bp higher and the USD getting hit through Powell’s presser.I think the inversion resulted from investors buying longer-term TIPS to offset that inflation risk; hence, the 10y Treasury yields fell mechanically. I don’t consider it a sign of recession but a reflection of inflation haven assets not performing as expected, so TIPS were perceived as a more reliable bet.
Still, the primary tool for tightening financial conditions was the real curve, and I continued to see real rates moving significantly higher through 2022; hence higher reals should limit gold top side ambitions as the hawkish Fed should open the door to every central bank to keep the pedal to the metal and fight inflation.
Forex
Eur
Today’s currency markets have a mechanical propensity to chase risk, so I’m not putting a lot of faith in the post FOMC bounce on the EUR/USD. That said, the hawkish Fed did open the door to a more hawkish ECB iteration and as we have seen in past episodes where the markets price out NIRP, the euro flies.
And since cease-fire trades have become increasingly popular, particularly in the energy market, I think the EUR/USD could hold a bid. Lower energy prices are good for the EU economy hence the euro.