U.S. markets are shaken by the Federal Reserve System’s (Fed) hawks as most FOMC members want to resume rewarding bond purchases before the end of this year.
Louis Fed President Bullard even wants to see the Fed finished with the QE program before the end of the first quarter of 2022. Will the Fed talk about the going?
Looking at how the Covid situation is evolving now, there is probably little chance of seeing the Fed end with the bond purchases within a quarter. Conversely, there is a growing likelihood of seeing real Fed expectations soften in the coming months. What happened in New Zealand this week is proof that things could change quickly.
In this sense, worsening Covid news, soft economic data and deteriorating sentiment could convince Fed members that removing support prematurely, as Jerome Powell would say, is not a good idea.
Currently the impertinent readjustments to Fed policy are improving stock price volatility as the market is about to lose its main catalyst of gains: the cheap liquidity. The Fed’s support was the main driver behind the impressive post-pandemic demonstration, the end of the support could be the end of it.
The VIX index jumps more than 20% as a reaction to the Fed minutes, and is probably just the beginning before things get worse from September.
However, there is hope: the threat of a narrow-mindedness attack is real and will likely keep the Fed fairly prudent when it comes to concrete action.
In the FX, we see the green dollar progressing to the highest levels since November due to a clear sad change in the Fed’s policy stance. The DXY has a chance for at least a 5-7% recovery if the Fed talks, which would bring us somewhere close to the 98-100 region in the coming quarters, especially knowing that few opportunities we see other major central banks, such as the European Central Bank or the Bank of Japan shifting to a less harsh political view.
Gold remains offered near the $ 1800 per ounce, but rising volatility, and further turmoil in equities could upset the sentiment and bring about significant gains in the yellow metal.
US crude, on the other hand, is now testing the support of $ 63 bp and the next bearish target for the bears is $ 60 per barrel mark, where the 200-day moving average stands. The main catalyst is the growing Covid concerns and news of measures taken to avoid further contagion worldwide. Even the most recent downside in U.S. inventories could not smile at the oil bulls, while U.S. inventories fell more than 3 million barrels last week, more than twice as much as the 1.5 million barrels written by analysts. The real mood shows a deeper drop in oil prices and price hikes could be interesting excellent sales opportunities for those aiming for a return to the $ 60-bp.