(Ipek Ozkardeskaya – Swissquote Bank Ltd)
Risk sentiment is morose this week with the escalating tensions in Ukraine, rising Covid cases in China, mounting tensions between US and China, the selloff in US and other treasuries, the relentless appreciation in the US dollar and the drop in safe haven currencies.
The Swiss franc lost ground against the greenback and the USDCHF rose above parity. The Japanese yen continued its historic fall as well, the dollar yen advanced to 145.80.
Gold fell for the fifth day to $1660 per ounce, and is set to dive deeper toward the $1600 level on the back of a relentless rise in the US yields and the dollar.
And the US yields press higher on the back of hawkish Federal Reserve (Fed) pricing, despite a couple of less hawkish comments from some Fed members at the start of the week.
The US 2-year yield advanced to 4.35%, and activity on Fed funds futures price 77.5% chance for a 75bp hike at next FOMC meeting. Even the UK yields shot higher despite the Bank of England’s (BoE) announcement of more measures to calm down the Truss-hit gilt market.
At least, the avalanche of bad global news has been successful in pulling oil prices lower yesterday. The barrel of American crude eased to $90 this morning, after having flirted with $94 a barrel on Monday.
US earnings season kicks off in a dark and depressed environment. According to data from FactSet, the EPS growth of the S&P500 companies should fall by 2.6% to below 10% in the Q3.
Making sense of the recent Fed narrative
(Giles Coghlan LLB, Lth, MA – HYCM)
What is the Fed pivot?
The ‘Fed Pivot’ is a micro-narrative that has developed recently in response to slowing US data. When US data prints negatively, then the prospect of a Fed Pivot is thought to increase.
But what is the ‘pivot’
To pivot simply means to change direction. So, the idea of a Fed pivot is that the Fed will change from its aggressive hiking stance to a slower path of rates.
When is a ‘pivot’ expected?
The markets love micro-narratives, so when bad data comes in from the US the ‘pivot’ calls grow louder. When good data comes in from the US the ‘pivot’ calls grow weaker.
What’s the market reaction?
- For stocks: If the Fed pivots then that means a lower terminal rate and/or slower path of rates. This is good for stocks. So, the bad news is good news in that sense for the stock market. If there is bad US data expect US stocks to rally.
- For currencies: If the Fed pivots this weakens the USD. As US10-year yields fall we would expect USDJPY downside and EURUSD upside.
- For bonds: If the Fed pivots US bond yields should fall as bond buying steps up.
- For precious metals: A Fed pivot would likely be supportive for precious metals. A falling USD and falling yields should lift both gold and silver. With the gold/silver price ratio pushing higher then silver can outperform gold. Many traders look at the gold/silver ratio and will choose a silver trade over and above gold when the ratio rises.
So keep this framework in mind. When incoming US data make it look like a pivot is coming then expect these reactions. Also, the opposite is true, so if a Fed pivot is seen as less likely then expect the opposite reactions.