Equities rallied and treasuries dived yesterday, as a sign that investors are cheering the Federal Reserve’s (Fed) plan to deal more aggressively with the skyrocketing inflation – which is certainly more toxic in the longer run than higher rates for the economic tissue.
But in reality, the Fed is just figuring out the least bad policy to rectify the terrible mistake it made by letting inflation run this hot. And scaling back too rapidly to return to the far-missed inflation target could cause a recession. This is what the flattening, and inversion of the US yield curve warns.
The good news is that Powell’s got the market wind behind his back – for now. However, the market support could rapidly wane if the economic data begins softening and corporate earnings start slowing.
Anyway, the S&P500 had another strong session yesterday gaining more than 1%, and Nasdaq rallied close to 2% as technology stocks led the rally. The index crossed above its 50-DMA for the first time since the beginning of the year, and stepped into the medium term bullish consolidation zone after clearing the major Fibonacci 38.2% level on November – March selloff. Will it last? Hard to tell. The volatility is coming down, as investors welcome the Fed’s decision to step on the gas for tightening the policy, yet the hangover could soon kick in, as the news doesn’t match the market optimism.
Speaking of optimism, GameStop soared more than 30% as AMC gained 15%. Chinese stocks had another great day yesterday, as the share price rallied 11%, and more than 55% since last week.
Heavy battle near $110 per barrel
Oil trading is hectic these days, as prices swing between those who rush to sell the top near the $115pb level, and those who rush to buy below $110pb.
The price of a barrel of US crude stabilized near $110 this morning, but the news that Germany and Hungary are willing to put the brakes on a potential Russian oil embargo softens the bulls’ hands in the short run. The long term outlook remains positive.
More sanctions
EU countries will discuss with Biden on Thursday about new sanctions on Russia, and what to do if China continues supporting a nation that the West wants to isolate, hoping to stop the war in Ukraine.
So far, the sanctions didn’t stop Putin from increasing the intensity of the war in Ukraine, and the ruble which initially lost up to 40% of its value against the US dollar recovered a good part of losses. And the country didn’t even default on its interest payments despite big challenges.
Even if the West increases the intensity of their economic attack on Russia, as long as oil and other commodities come from Russia, the moves will weaken but not kill the beast.
