All eyes on the US Federal Reserve…
the Fed may possibly want to strike more cautiously
The market is now priced for a 0.50% interest rate hike in today’s US Federal Reserve’s policy meeting, 3 more consecutive hikes of 0.50% in the next 3 meetings and a 0.25% hike in the remaining 2 meetings this year.
This gives a total of 2.50% rise in policy interest rate by the end of the year. The market also expects the Fed to start with balance sheet reduction today. The Fed is likely to fulfil these expectations with their action and tone of statement.
However, with inflation data falling slightly short of expectations recently (although still at high levels), and growth indicators slower, the Fed may possibly want to strike more cautiously. If they should do so, it will help risk sentiment.
If they continue to talk tough, and threaten to be even more aggressive than market pricing, risk sentiment will likely weaken further.
TRADING TIP
Re-evaluating Themes & Trade Expressions
As our readers may have noticed, we trade by first figuring out what are the themes that will drive the world in the weeks and months to come. Only then do we go about searching for the optimal trade that will profit from these themes coming to fruition.
Having the wrong trades and the wrong themes end up with a simple outcome, we stop out and move on with our lives. However, in the case where we find the right themes and the right trade expressions, the trades could stay in our portfolio in various sizes throughout as the trend develops.
The danger is then overstaying our welcome in the trades, and this is especially the case when the theme continues to be a dominant theme but the trades we chose previously have either run its course or have ceased to be the best risk vs reward trades to profit from the continuation of the themes.
As such, it is imperative to keep re-evaluating your trades to ensure they are always the best use of your risk capital and the best way to profit from what you think are the probable outcomes in the future.
DAY AHEAD
US ADP Employment Change should not be market moving given the Federal Reserve Policy Meeting a few hours later.
A 0.50% rate hike is expected from the long-awaited Federal Reserve’s May Policy Meeting. Fed Chair Powell press conference after will be closely monitored for his thoughts on the pace of future interest rate hikes and balance sheet reduction.
TRADING PLAN
1. Currencies:
EUR — Short the EUR. EUR remains weak. Sell on rallies to add to short.
2. Commodities: Uranium & Energy — Yesterday was a good day for energy stocks, and there will likely be more of these in the future. .
3. Stocks:
US Stock Index: The US stock market is now waiting for the Federal Reserve policy decision later today.
Single Stocks: TrackRecord Model Portfolio is tracking the broader market for now.
Key risks: US Federal Reserve policy decision, the tone of their policy statement and Fed Chair Powell’s comments in the press conference after the statement will dictate how the market moves for the next few days. The Ukraine-Russia war rages on, but the market impact is limited for now.
WHAT HAPPENED YESTERDAY
- The US 2 year Treasury Bond yield +0.05% while the 10 year yield fell -0.02%.
- The US stock market rose as the Federal Reserve meeting draws closer. The S&P 500 rose +0.48% (intraday lows: -0.20%), the Dow Jones Index increased by +0.20% (intraday lows: -0.44%) while the Nasdaq creeped higher by +0.11% (intraday lows: -0.71%).
- The crypto market traded weaker despite the relatively stable performance of the US stock market. This is likely just speculators adjusting their positions ahead of the Fed policy meeting. Bitcoin fell -2.1% to 37,723 while Ether decreased -2.6% to 2,781.
HEADLINES & MARKET IMPACT
Beijing city closes gyms and bans dining in as Covid controls tighten
Notable Snippet: Two months since China’s latest Covid outbreak began, many businesses in the country’s two largest cities by GDP face new or existing constraints on operations.
Over the weekend, the capital city of Beijing closed theme parks and banned dining in restaurants to control Covid — just as a five-day holiday got underway. During the holiday last year, domestic tourism revenue nationwide had more than doubled from the prior year, according to official figures.
Universal Beijing Resort closed Sunday until further notice. All gyms, entertainment and live performance venues, internet cafes and other indoor sports facilities are to close for the holiday, which officially runs through Wednesday, the city government said.
Beijing has been conducting multiple rounds of mass testing in the last week. It also announced weekly tests would be required after the holiday to take public transit or go to public areas like supermarkets.
WHAT WE THINK: The Covid situation in China seems bleak and it could spell more trouble on the inflation front. This is something that we have to stay wary of.
For more actionable content with our levels and views, sign up for our Membership to get the full length version of our Dailies.
The Fed is expected to raise rates by a half point. Investors wonder if it will get more aggressive
Notable Snippet: The Federal Reserve is widely expected to raise its fed funds target rate by a half-percentage point Wednesday, but investors will be more focused on whether it signals it could get even tougher with future rate hikes.
The Fed also is expected to announce the start of a program to wind down its roughly $9 trillion balance sheet by $95 billion a month, starting in June. The 50-basis-point hike would put the fed funds target rate range at 0.75% to 1%. A basis point equals 0.01%.
The central bank’s communications on Wednesday will be key, given the slowing in some data while inflation is still hot. Economic growth contracted by 1.4% in the first quarter, but economists say it was distorted by trade data and they expect second-quarter gross domestic product to bounce back.
WHAT WE THINK: It is unlikely that the Federal Reserve will be more aggressive than what is currently priced in given that they are moving forward with the tightening on the pretext of a healthy labour market. Excessive tightening may work against them and they are wary of that.
For more actionable content with our levels and views, sign up for our Membership to get the full length version of our Dailies.
U.S. relieved as China appears to heed warnings on Russia
Notable Snippet: Two months after warning that Beijing appeared poised to help Russia in its fight against Ukraine, senior U.S. officials say they have not detected overt Chinese military and economic support, a welcome development in the tense U.S.-China relationship.
U.S. officials told Reuters in recent days they remain wary about China’s long-standing support for Russia in general, but that the military and economic support that they worried about has not come to pass, at least for now. The relief comes at a pivotal time.
As well as steering clear of directly backing Russia’s war effort, China has avoided entering new contracts between its state oil refiners and Russia, despite steep discounts. In March its state-run Sinopec Group suspended talks about a major petrochemical investment and a gas marketing venture in Russia.
WHAT WE THINK: It appears that China is being wary about the economic impact of supporting Russia on its economy. This should be good news on the war front as it should allow Western efforts against Russia to be more effective.
For more actionable content with our levels and views, sign up for our Membership to get the full length version of our Dailies.
SENTIMENT
FX
STOCK INDICES
Best,
Phan Vee Leung
CIO & Founder, TrackRecord
