The FOMC minutes provided the clarity that all investors have been looking for: The Federal Reserve (Fed) will reduce its balance sheet by nearly $9 trillion by $95 billion a month, or more than $1 trillion a year.

Additionally, many Fed officials noted that “one or more 50 basis point increases in the target range may be appropriate in future meetings, particularly if inflation measures remain elevated or intensified.”

Stock and bond markets did not react well to the cruel brutality of the FOMC’s final minutes. Three major US indices fell, but value stocks lost less than growth stocks. Thus, we saw the Dow Jones pull back 0.42% towards its 50-DMA, the S&P500 drop almost 1% below its 200-DMA and the Nasdaq slip more than 2% towards important Fibonacci support. .

The US 2-10 year spread is back in the positive after slipping below zero, but the threat of a recession is real, keeping investor sentiment sour as the Fed withdraws support.

Stock and bond prices must fall if the Fed is to counter supply-side inflation with demand-side cooling.

In the FX

The U.S. Dollar remains strong and the Dollar Index is consolidating just below the 100 level. will see a slight downward correction in the greenback following the increase in Fed minutes. EURUSD shortly slipped below 1.09 as the divergence between the hawkish Fed and the indecisive and insensitive European Central Bank (ECB) plays in favor of a weaker Euro, combined with the growing popularity of the right-wing Marine Le Pen in the French electoral polls, which is also seen as a threat to European integrity.

Good news?

The good news is that China has announced that it will step up monetary stimulus to provide support to counter the negative impacts of the latest Covid restrictive measures which sent the Caixin Services PMI to a chilling 42 level in March.

And US crude prices have returned to pre-war levels. US crude oil has slipped below the critical 50-DMA support, and the negative movement appears to be longer lasting than those we have seen over the past few weeks. The loss of bullish momentum portends a deeper downside correction that could send the price down towards the $88/90 barrel area where it could meet the 100-DMA and the major 61.8% retracement during the rally from December to March. If the fall is long-lasting, we could start to see some easing of inflationary pressures, but it’s unclear how long oil’s pullback will be and how low prices could fall given the widening gap between supply and demand.

Anyway, it is better to see the price of the barrel below the $100 mark, then above!

Ruble back to pre-war levels

One of the main drivers of the decline in oil prices is European reluctance to ban Russian oil. The West, however, is sticking to new measures to pressure Putin to end the war in Ukraine, he sanctions his daughters, Lavrov’s family, Russian banks. The UK froze Sberbank’s assets as the US imposed full freezing sanctions on Sberbank and Alfa Bank. More importantly, the United States does not allow Russia to process payments in US dollars, which forced the country to pay its $650 million in interest in rubles instead. But contractually they are not allowed to pay in rubles, so the bonds could actually default. We are now within the 30 day grace period.

But interestingly, the Russian ruble is doing well. USD-RUB has fallen to pre-war levels as generous oil and gas revenues keep the currency well valued despite sanctions. European Council President Michel Charles told the European Parliament yesterday that “measures on oil and even gas will be needed sooner or later”. In market parlance, this means that risks to oil prices remain tilted to the upside.

Gold, on the other hand, remains little changed near $1920 an ounce. Rising yields hint that the medium-term direction should be south, and we may see the price per ounce drop sustainably into the $1800/1820 zone, which includes the 200-DMA. What’s keeping gold prices buoyant at the moment is the fact that Russia is one of the largest gold producers and demand for safe-haven remains tight as geopolitical tensions remain relatively high. .

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