Markets
The S&P 500 tumbles as the Fed goes whistling past the grave triggering a swath of asset rotation out of equity markets and into US bonds. At the time of writing the S&P, 500 fell -1.5 % while US bond yields fell to critical support level 2.75 %. But indeed, the S&P losses accelerated after taking out February lows while high yielding FX has fallen victim to a broad USD rally.
Given all the Pre FOMC-jitters in the rates markets some significant dovish bests had priced in 1 rate hike for 2018 and with the Fed remaining ” on autopilot” while only adjusting their projections from 3 to 2. These significant dovish bets went completely awry, but instead of a cut run or lamenting over spilt milk, Algos were quick off the mark to cut and reverse positions which added to the bloodletting and downward momentum on Wall Street.
But price action is extremely concerning and speaks volumes about just how poor market sentiment is, as indeed the Feds did pony up a dovish hike while sticking to their data dependant matters. While the Fed debate will carry on through Asia and into London but if there was any glint of a hawk in Powell’s statement it was this:
“Some years ago, we took away the lesson that the markets were susceptible to news about the balance sheet, so we thought carefully about how to normalise it and thought to have it on automatic pilot and use rates to adjust to incoming data. That has been a good decision, I think, I don’t see us changing that.”
This comment suggests interest rate adjustment will be the Feds preferred policy tool on a data dependent basis. So, on that basis alone when you consider the recent spate of weaker economic metrics around the globe, the Fed continues to be the last man (central bank) standing on that front given the US economy has still put up good numbers, albeit softer of late.
The overall messaging from the Fed is one of confidence while providing policy breathing room on a data dependent basis is that the Fed is still ‘confident’ but very much ‘data-dependent.’.
In Summary, the Fed delivered a dovish hike, but clearly, there wasn’t enough affirmation in the statement that the Fed was close to pausing or ending their interest rate hike cycle sooner than expected. On balance, this is moderately dollar positive.
Oil markets
WTI rallied over 2.0% into the Fed, leaving WTI testing $48.00. Overall this reflected realisation that that Tuesday move was a little bit too far too soon and improvement on risk sentiment ahead of the Fed.
However, Risk assets and oil prices reacted poorly to the Feds forward guidance which suggests the Fed remains on ” auto pilot”. After a short covering rally into the Fed decision oil prices have come off again.
So, traders are back to dealing with the supply-demand equation which suggests the path of least resistance remain lower given we could be during a massive washout in equity markets. And while the EIA data looked more supportive than Tuesday’s American Petroleum Institute report, domestic crude supplies fell by 500,000 barrels but a massive 4 million barrels in distillate supplies
But with an enormous inventory builds in Cushing lingering, the data is likely not enough to provide a significant lift.
The Energy Information Administration reported Wednesday that domestic crude supplies fell by 500,000 barrels for the week ended Dec. 14 domestic oil supplies fell by 500,000 barrels. However, oil trader and risk, in general, may take some temporary comfort in the fact Chair Jay Power didn’t send off any early warning signals about the US economy which might be enough to sway the overwhelming negativity in the markets.
Its been a tumultuous week in Oil markets and traders may opt to shut it down after the last big risk event of the year with year-end positions squaring will likely kick in today.
Oil News
Early in the session, Saudi Energy Ministers was doing his best moral suasion act trying to ease growing concerns about the efficacy of the latest production cut and suggesting the deal will be extended in April. Trader barely blinked an eye.
Protesters have left Lysias large Sahara oil fields, and the NOC has confirmed pumping will resume, which is also weighing on prices.
Gold markets
Overall, the FOMC was moderately dollar positive and coupled with the fact the FED didn’t signal a definitive pause on interest rates. Gold prices shifted lower as bets on a dovish Fed unwound. And while the Fed decision is temporarily outweighing the positive from the equity market rout, gold should remain well supported above 1240 as risk sentiment could continue to struggle. But overall it could be time to shut it down as year-end position squaring is likely to take hold
Currency markets
Before the Fed, USD traded offered, while equities firmed in a pre-Fed positioning move while some headlines did weigh on the conversation. Specifically, US November existing home sales beat expectations thanks to gains in both single (+1.9%) and multi-family (+1.7%) homes, which is excellent news for the US economy as housing has been one sector flashing red for some time.
EUR: The EUR traded to 1.1440 as result of pre-Fed positioning and in part to a well-telegraphed EU budget deal with Italy. But with the Fed coming across relative balance markets are back to a price neutrality level around 1.1375-1.1.395 as on balance the market has unwound the dovish ECB and poor PMI while factoring in a definite positive shift in Italy risk. Year-end flows are unpredictable, but its more likely the EUR/USD will continue showing its stubbornness to move materially from a 1.13 handle.
AUD: It’s hard to argue the AUD/USD as the Aussie was hanging on by a wing and a prayer hoping for a miracle pause from the FED. The market is back focusing on China risk and housing and credit issues domestically which don’t paint a rosy outlook especially with the global economy going into the tank.
CNH: Mainland policymakers made an unexpected policy move at the NY open he PBoC announced plans to create a targeted medium-term lending facility (TMLF), to provide long-term funding to banks to support their lending to SMEs and POEs. This is not a significant enough liquidity add to shift the Yuan weaker, but the moderately stronger USD has put a bid under the USD/CNH in early trade.