Market volatility after Federal Reserve’s hawkish outlook

Posted on January 27, 2022 by Vrasidas Neofytou

It was another wild session for the global financial markets on Wednesday, with equities starting with significant gains and finishing lower following the latest hawkish monetary policy decision from the U.S. Federal Reserve to curb the soaring inflation.

Investors worry that the speed with which the Fed would tighten its accommodative monetary policy, higher interest rates, together with record-high inflation could have a significant impact on the economic recovery after the pandemic.

Nasdaq Composite, 30-minutes chart

However, futures tied to the U.S. stock indices and European equities managed to recover earlier losses on Thursday morning, with the tech-heavy Nasdaq Composite turning positive by 0,50% as dip buyers come back to the market after the fierce tech sell-off.

Fed’s hawkish stance:

Markets erased earlier gains on Wednesday after Fed’s chair Jerome Powell signalled that the bank could soon raise interest rates beginning in March, for the first time since December 2018.

Powell continued saying that there was room for further interest rates hikes and policy tightening without threatening employment, concluding that the central bank was of a mind to begin hiking rates to as soon as March.

The statement from Powell’s press conference comes in response to CPI- Consumer Price inflation index running at its hottest level in nearly 40 years of 7% in December 2021, much beyond Fed’s inflation target of 2%.

Some analysts speculate that Fed might raise rates more than 4 times this year, or even hike in 50-basis-point in March to cool high inflation.

U.S. dollar rises to two-month high:

U.S dollar rose across the board yesterday as forex traders turned bullish on the greenback following Fed’s hawkish stance.

The DXY-U. S dollar index which measures the greenback against major peers jumped to near 97 mark last night, its highest since mid-December,2021, getting support from the rally in U.S. bond yields which have managed to climb to pre-pandemic levels.

The yields of the 2-year bond rose to 1,20% on Thursday morning, climbing to a 23-month high, while 10-year yields hovered near one-week highs of 1,90% touched in the previous session.

2-year U.S. Treasury yield, Daily chart

The soaring greenback pushed the rest of the currencies lower, with the EUR/USD pair breaking below the $1,12 support level for the first time since late November 2021, while Japanese Yen retreated towards 115.

A similar picture on the growth-led currencies, with Pound Sterling falling to $1,34 level, losing almost 300 pips since mid-January, while the Australian and Canadian dollars dropped to $0,70 and $c1,27 respectively despite Brent crude topping $90/b on soaring geopolitical tensions in Ukraine and the Middle East.

Precious metals retreat on higher dollar and yields:

The stronger dollar and the higher bond yields pushed precious metals 1,5% lower yesterday, with the price of the Gold retreating towards the $1,800/oz support level, while Silver fell to as low as $23/oz, hitting a two-week low.

A stronger dollar, higher bond yields, and interest rate hikes dent the appeal of dollar-denominated bullions by raising the opportunity cost of holding non-interest paying Gold and Silver.

Russian rouble sinks to over 14-month low on Ukraine crisis

Posted on January 25, 2022January 25, 2022 by Vrasidas Neofytou

The Russian currency “Rouble” fell 2,5% on Monday, tumbling to as low as 80 against the U.S. dollar and 90 to Euro, its weakest points since November 2020, followed by a fierce sell-off on Russian bonds and stocks, as investors concerned about a potential military conflict in Ukraine.

USD/RUB, Weekly chart

Analysts fear for further weakness in Rouble in case of hard-hitting sanctions against the Russian economy are imposed from the Western powers if Moscow escalates hostilities against Ukraine.

Investors also worry that a military confrontation between Russia and Ukraine could prompt Moscow to curb energy supplies to Europe since Russia accounts for 40% of gas supplies to the continent via pipelines.

On the contrary, economists in Russia have not been in a panic mood-at the moment- since the Russian central bank has over $600 billion foreign-exchange reserves, mostly revenues from oil & gas sales, the sovereign debt is very low and held by domestic investors, while the country has developed alternative financial channels that bypass Western ones.

Geopolitical risks weigh on Russian bonds and stocks:

Russian assets were in near-freefall Monday, down almost 10%, with tens of billions of dollars wiped from the value of the country’s largest firms following the negative geopolitical situation.

The Russian stock market has been in a major downtrend momentum with the major index plunging 15% since the start of the year and losing more than 30% of its value since October 2021, or more than $200b in value, when Russia’s military build-up began.

Its good to be mentioned that the Russian stock market fell by 80% in 2008 during the preview’s military conflict in the Caucasus, between Russia and Georgia.

We have seen a selling pressure on Russian government bonds as well these days since they are sensitive to geopolitics, with Russia’s 10-year OFZ bond yields surging to near 10%, their highest since early 2016.

Ukraine-Russia border conflict:

Russian assets have been under pressure in recent weeks as a build-up of around 100,000 Russian troops along the Ukrainian border sparked fears from NATO and allies that Moscow was planning an invasion, an allegation the Kremlin has persistently denied.

NATO said it was putting about 8,500 American troops on standby and reinforcing eastern Europe with more ships and fighter jets, in what Russia denounced as an escalation of tensions.

On top of that, Australia, the UK, and the U.S. started partial evacuations of their embassies in Kyiv, the Ukrainian capital, while more Western countries advised people not to travel to Ukraine or Russia.

The U.S. and NATO have ruled out agreeing to Russia’s demands that the alliance roll back its troop deployments from eastern members and give a legal guarantee that Ukraine and Georgia will never join.

The commodity sector outperforms in 2022 as inflation persists

Posted on January 20, 2022January 20, 2022 by Vrasidas Neofytou

Commodity markets have been in a bullish momentum since the start of the year, outperforming technology and financial sectors despite concerns over the impact of the Omicron variant on-their demand growth.

Strong commodity demands, supply outages, logistics disruptions, declining stockpiles, dollar weakness, and the ongoing geopolitical tensions have been key drivers of sentiment fuelling commodity prices to multi-year highs.

Investors have also shifted their funds to value sectors such as energy and raw materials, which stand to benefit from the steepest inflation in nearly forty years. (Over 4 decades)

Over the last year, rising energy and food commodity prices have been the primary drivers of overall inflation, forcing central banks to become more aggressive in normalizing their previously accommodative monetary policies.

The crude oil market has surged 15% so far this year, with the price of the international benchmark Brent climbing to as high as 87 dollars per barrel, its highest since 2018.

A similar picture can be found in Europe’s energy market, with natural gas, coal, and electricity prices skyrocketing to record highs following the Russia-Ukraine conflict, with record-low gas supplies from Russia, and below-average storage levels.

Looking at the precious metals, Gold and Silver they have reached a three-month high due to soaring inflation rates, while industrial metals Copper and Aluminium trade to near-decade highs.

Brent tops $89/b to its highest since 2014 on geopolitical tensions and tight supplies

Posted on January 19, 2022 by Vrasidas Neofytou

The international oil benchmark Brent climbed to its highest level since Oct. 13, 2014, on Wednesday morning, topping $89/barrel as investors worried for possible supply disruptions from geopolitical tensions, supply outages, at a time of robust fuel demand.

Brent crude, Daily chart

A similar picture on the U.S.-based WTI oil contract, which climbed $1,50, or 2% to $87/barrel, its highest since Oct. 9, 2014.

Geopolitical issues are adding to the supply concerns:

The geopolitical tensions raise the prospect of supply disruptions at a time when some members of the OPEC+ alliance are already having difficulty meeting their agreed target-quotas to add 400k bpd of supply each month, tightening further the global crude market.

As a result, a geopolitical premium has been added on the oil prices since the beginning of the week, following the ongoing Russia-Ukraine conflict, an explosion on the Iraq-Turkey oil pipeline last night, and the attack of the Iran-backed Yemen’s Houthi group on petroleum facilities in UAE, the third-largest oil-producing member of OPEC.

Explosion on the Kirkuk-Ceyhan oil pipeline:

Both Brent and WTI oil prices hit a 7-year high this morning following a report from Turkey’s state pipeline operator Botas, saying that it cut oil flows on the Kirkuk-Ceyhan pipeline after an explosion on the system, without saying the cause of the explosion.

The pipeline usually carries 450k bpd of crude oil from the Kurdish city of Kirkuk in northern Iraq, into the Turkish port of Ceyhan in the Mediterranean Sea for export.

Iraq is the second-largest producer in the Organization of the Petroleum Exporting Countries (OPEC) and is using Ceyhan port to supply sweet crude oil to its European customers-refiners.

Drone attack in oil-rich UAE:

Yemen’s Houthi rebels increased the geopolitical tension in the oil-rich Middle East region once again after launching drone and missile strikes against state oil firm ADNOC’s storage facilities on the outskirts of the UAE’s capital city of Abu Dhabi on Monday morning, killing three people, and warning for more attacks soon.

UAE, which is the world’s seventh-biggest oil producer, pumping just over 4 million barrels per day, has vowed to retaliate against Houthi fighters for the deadly attack, pushing crude oil prices to their highest level in seven years, and prompting some energy analysts to forecast a price return to above a $100 per barrel.

UAE together with Saudi Arabia set up a military coalition against Iran-aligned Houthis rebels in Yemen in 2015, to stop them from taking the control of the geographically important country against the Saudi-backed government.

Russia-Ukraine conflict:

On top of the geopolitical conflicts in Turkey and the Middle East, oil prices get support from the ongoing tensions on the Russia-Ukraine borders, as energy traders fear for a possible military accident between them, disrupting Russian oil and gas supplies to Europe.

Russia is the world’s second-largest energy producer while neighbor and ex-Soviet state Ukraine has been a crucial transit country for Russian gas exports towards the thirsty for gas Western Europe led by Germany, and Austria.

Bullish momentum despite Omicron-led fuel demand concerns:

Adding to the bullish price momentum, the impact of the outbreak of the Omicron variant on the global fuel demand has been less disruptive as initially feared, despite the renewed social and travel restrictions in some parts of the world to tackle the spread of the virus.

U.S dollar falls to a two-month low despite U.S inflation hits 40-y high of 7%

Posted on January 13, 2022 by Vrasidas Neofytou

Forex traders turned bearish on the world’s reserve currency, with the DXY-U.S. dollar index breaking below the 95 key support level on Thursday morning, its lowest level since mid-November, as the U.S. CPI inflation data was not hot enough to force faster monetary tightening by the Federal Reserve.

DXY-U.S. dollar index, Daily chart

Dollar weakness despite soaring CPI inflation data:

The U.S. Bureau of Labour Statistics announced yesterday that the CPI-consumer price index, a key inflation indicator that measures what consumers pay for goods and services, rose 7% in December from a year earlier, the fastest pace since June 1982.

However, the major U.S. stock indices ended Wednesday’s trading session higher, while the U.S dollar and bond yields softened across the board yesterday as the hot pace of inflation was generally in line with expectations.

As we mentioned earlier, the CPI data rose 7% in December, which was slightly higher from 6,8% in November, posting its third straight month in which inflation exceeded 6%.

Market reaction:

The US Dollar Index (DXY), which measures the greenback against six major rival currencies led by Euro, broke below 95.00 key support this morning, falling to as low as 94,70 before rebounding to 94,85 later the day.

EUR/USD pair, Daily chart

The dollar weakness across the board boosts other currencies higher, with Euro climbing to near $1,147, its highest level since mid-November, while the risk-sensitive Australian and New Zealand dollars bounced to a two-month high of $0,73 and $0,687 respectively.

Higher inflation is not enough to change an already hawkish monetary outlook:

Investors believe that the strong U.S. inflation data is not enough to change an already hawkish monetary outlook, and it could not shift expectations for the Federal Reserve to begin lifting interest rates as soon as March 2022.

The U.S central bank has already announced plans for rate hikes and tapering its massive pandemic-led economic stimulus programs in 2022 to curb red-hot inflation because the recovering U.S. economy no longer needed emergency support.

The yields of the 10-year Treasury note climbed to as high as 1,80% a few days ago before retreating slightly lower, pricing in three hikes in 2022.

Surging bond yields deflate technology valuations

Posted on January 12, 2022January 12, 2022 by Vrasidas Neofytou

The tech-heavy Nasdaq Composite lost as much as 10% during the first trading days of 2022 as the tightening of financial conditions and the rising bond yields deflated technology valuations.

The yield on the 10-year Treasury note climbed to 1,80% its highest level since January 2020, influenced by concerns that the policymakers may raise rates more aggressively than previously expected to curb heated inflation.

Federal Reserve, the world’s most important central bank had already signalled it would start raising interest rates, taper bond-purchasing programs, and reduce holdings of Treasuries and mortgage-backed securities.

The hawkish comments from policymakers triggered a sell-off in global stock markets which escalated even to growth companies.

Since the possibility of higher rates reduced the value that investors see in the future cash flow of technology companies.

Investors dumped shares of high valued tech companies and piled into sectors of energy, financial, and industrial markets that could profit from a rise in interest rates, and economic recovery.

The zero interest rates helped fuel a huge rally in growth sectors such as technologies and cryptocurrencies, making bonds and value stocks less attractive for investors.