Fed’s tightening grip unnerves equities

Fed to accelerate balance sheet reduction

The FOMC minutes were released overnight and signalled a faster pace of balance sheet runoff then on previous occasions, targeting USD 95 billion per month from September, easing into the process from next month. The minutes also suggested that some 50 bp Fed Funds hikes were on the cards and expect that to happen from next month. Only the Ukrainian war stayed the FOMC’s hand this month it seems.

The reaction in the markets was mixed as much of the minute’s contents had already been telegraphed by Lael Brainard the day before. The US dollar and US bond yields rose only modestly. Equities, though, took another dive lower. That makes sense given that equity markets have been steadfastly ignoring the reality of tighter monetary policy and the end of zero per cent interest rates and central bank back-stopping of the party. It will be interesting to see in the coming months, the reaction of housing markets to policy normalisation, both in the US and abroad.

The International Energy Agency announced a coordinated global release of 120 million barrels of oil overnight to ease tight global supplies. The net release is actually only 60 million barrels as it includes 60 million from the US which is part of their 180 million barrel release. Oil prices eased by around 4.0% on the news, and higher US crude inventories, but that is an average day in oil markets these days. Notably, and despite the Shanghai lockdown and cases soaring to 20,000, Asia has walked in the door and bought the dip today. Much like the FOMC minutes, the news seems to have been priced in already to some extent.

The US tightened sanctions on Russian banks and prominent citizens overnight as well. But once again, the impact was muted. From the US and European perspective, one gets the impression that the sanction low-hanging fruit has been picked. Anything from here on will require material economic sacrifice, particularly for the Europeans. That reality may go some way to explaining why European equities had such a poor session overnight.

In Asia, Australia’s Trade Balance suffered a serious hiccup. The headline number fell to AUD 7.457 bio versus an expected print of AUD 12 bio. Exports rose by 0.20% (6.0% exp), but it was imports that shocked, rising by 12.0% (1.0% exp). Looking through the numbers, processed industrial supplies, fuels and lubricants, and transport equipment were the main culprits. It seems like everywhere else; the lucky country can’t entirely dodge the cost-push inflation sweeping the world. The surplus was the smallest since March 2021 and has pushed the AUD down 0.30% today after it endured a torrid session overnight as markets priced in a far more rapid hiking cycle from the FOMC than the RBA.

The Asian calendar is quiet today leaving local markets at the mercy of headline-driven volatility, with Eastern Europe and China covid headlines at the top of the list. German Industrial Production will likely fall to zero per cent this afternoon, and Eurozone Retail Sales could suffer the same fate, as the Ukraine malaise deepens. The US calendar is also quiet today, but I count five Fed speakers this evening which could provide some volatility.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Jeffrey Halley

Jeffrey Halley

Senior Market Analyst, Asia Pacific
With more than 30 years of FX experience – from spot/margin trading and NDFs through to currency options and futures – Jeffrey Halley is OANDA’s senior market analyst for Asia Pacific, responsible for providing timely and relevant macro analysis covering a wide range of asset classes. He has previously worked with leading institutions such as Saxo Capital Markets, DynexCorp Currency Portfolio Management, IG, IFX, Fimat Internationale Banque, HSBC and Barclays. A highly sought-after analyst, Jeffrey has appeared on a wide range of global news channels including Bloomberg, BBC, Reuters, CNBC, MSN, Sky TV, Channel News Asia as well as in leading print publications including the New York Times and The Wall Street Journal, among others. He was born in New Zealand and holds an MBA from the Cass Business School.
Jeffrey Halley
Jeffrey Halley

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