US markets are being shaken by the Federal Reserve (Fed) hawks, as most FOMC members want to start dialing back the bond purchases before the end of this year.
Louis Fed President Bullard even wants to see the Fed done with the QE program by the end of the first quarter of 2022. Will the Fed talk the walk?
Looking at how the Covid situation evolves right now, there is probably little chance of seeing the Fed done with the bond purchases within a quarter. On the contrary, there is a growing likelihood of seeing the actual Fed expectations soften in the coming months. What happened in New Zealand this week is a proof that things could change fast.
In this sense, worsening Covid news, soft economic data and deteriorating sentiment could convince the Fed members that removing support prematurely, as would say Jerome Powell, is not a good idea.
For now, the hawkish readjustments to the Fed policy boosts volatility in stock prices as the market is about to lose its main catalyzer of gains: the cheap liquidity. The Fed support was the major driver behind the impressive post-pandemic rally, the end of the support could be the end of it.
The VIX index jump more than 20% as a reaction to the Fed minutes, and it’s probably just a start before things get worse from September.
There is hope though: the threat of a taper tantrum is real and will likely keep the Fed reasonably dovish when it comes to a concrete action.
In the FX, we see the greenback advancing to the highest levels since November on the back of a clear hawkish shift in the Fed policy stance. The DXY has potential for at least a 5-7% recovery if the Fed walks the talk, which would bring us somewhere near the 98-100 region in the coming quarters, especially knowing that there is little chance we see other major central banks, such as the European Central Bank or the Bank of Japan shifting towards a less dovish policy view.
Gold remains offered near the $1800 per ounce, but rising volatility, and a further turmoil in equities could reverse the sentiment and trigger important gains in the yellow metal.
US crude, on the other hand, is now testing the $63 pb support and the next bearish target for the bears is $60 per barrel mark, where stands the 200-day moving average. The major catalyzer is the rising Covid worries and news of measures being taken to avoid a further contagion worldwide. Even the latest drawback in the US inventories couldn’t give a smile to the oil bulls, while the US inventories declined more than 3 million barrels last week, more than twice as much as the 1.5 million barrels penciled in by analysts. The actual mood points at deeper pullback in oil prices, and price recoveries could be interesting top selling opportunities for those targeting a return to the $60 pb mark.
