The US and European futures are trading lower today, and traders aren’t expected to place bigger bets ahead of a key economic event. The FOMC minutes will be released later today, and traders will pay close attention to each word out of this event. There is no doubt that traders are highly concerned about the Fed making another policy mistake as they have adopted a very hawkish monetary policy stance. The speeches by the two Fed members brought further clarity concerning the Fed’s strategy in handling the soaring inflation situation.
Fed Governor Lael Brainard and San Francisco Fed President Mary Daly both made statements indicating that they expect higher rates and a rapid reduction of the central’s balance sheet. Dialling down rapidly on balance and an aggressive interest rate hike represents a great deal of risk for the US economy. Traders are worried that such an aggressive monetary policy could trigger a recession in the US economy. After all, if a dovish monetary policy can take an economy out of recession, a highly aggressive monetary policy such as the Fed puts the US economy on the edge of an economic recession. Investors certainly do not want to see the world’s biggest economy going into recession, but odds are staking up fast in favour of that. This becomes even more true when we begin to factor in the geopolitical picture that doesn’t paint an optimistic picture for the US and the global economy. The US 10-year Treasury yield has already jumped to a new 2022 high, yet another indicator that the US economy could be heading towards an economic recession.
Geopolitical tensions continue to flash on traders’ dashboards and keep them on edge. The US, EU, and G-7 are coordinating a new wave of penalties against Russia. The US and its allies have accused Russia of carrying out war crimes in Ukraine. According to White House Press Secretary Jen Psaki, the countries seek to boost sanctions on Russian financial institutions and state-owned firms and penalize unnamed Russian officials and their families. Putin sees his country as effectively at war with America and Europe as the US and its allies give weapons to Kyiv and train Ukraine’s military. This is a matter of grave concern for traders and investors because Western governments continue to argue that they do not desire to combat Russia on Ukrainian soil. Still, their ways of engagement with Russia are signalling red lights.
The black gold is trying its best to stay in positive territory, but bulls struggle to keep things that way. We have not seen a rally in oil prices because US’s European allies aren’t ready to sanction Russian oil as that will have a detrimental influence on their economy because of soaring energy prices, which are already fuelling inflation. In other words, the chances of sanctioning Russian oil are minimal, and traders do not see any supply issues, keeping oil prices in check. Both crude and Brent oil prices continue to stay above the critical level of $100, which indicates that bulls are still very much in control of the price.
The precious metal is likely to be highly volatile today as traders watch the FOMC minutes closely. It is already expected that these minutes will show another aggressive stance adopted by the Fed. The central bank wants to reduce the size of its balance sheet, and it wants to do that fast. Such a monetary policy stance will likely push the dollar index higher, and the gold price will likely suffer some losses.
Japan and Hong Kong, which reopened after a vacation, drove down an Asia-Pacific stock index by around 1.5 per cent. Chinese economic data also didn’t help the sentiment. In March, China’s services industry shrank considerably, indicating the economic damage that Covid outbreaks and the ensuing lockdowns are doing to the world’s second-largest economy. The Caixin China Services Purchasing Managers Index dropped to 42 in March from 50.2 in February, the lowest level since the initial epidemic in Wuhan in 2020. The figure fell below the 50-point threshold that distinguishes expansion from contraction, much below the median projection of analysts, which was 49.7.