Stocks surge after the Fed calms hawkish bets, BoE next – Daily Market Brief, May 5, 2022

European stocks are heading for a stronger start, tracking Wall Street higher after the Federal Reserve raised interest rates and mapped out more hikes.

·         The Federal Reserve raised interest rates by 50bp as expected and started QT

·         The BoE is expected to hike rates by 25bp, will it actively sell gilts?

·         OPEC+ are unlikely to deviate from the previously agreed 430k bpd increase

Wall Street indices surged higher yesterday after the Fed meeting, which calmed fears of a jumbo rate hike in the coming months. As expected, the US central bank hiked rates by 50 basis points and started to trim its balance sheet at $47.5 billion, rising to $95 billion in three months.

Federal Reserve Chair, Jerome Powell, also gave the markets a glimmer of hope that the central bank was unlikely to become more hawkish in the coming months. Powell & Co. mapped out further tightening with more hikes of 50 basis points are likely but not 75 basis points, which some policymakers had alluded to, in the upcoming meeting.

Powell’s comments led the market to believe that it had priced to the full extent of the Fed’s hawkishness. Stocks soared higher, with Nasdaq leading the charge, closing 3.2% higher, while the S&P 500 booked gains of 3% in its largest one-day jump since 2020. Meanwhile, the US dollar traced treasury yields lower, falling 0.86%.

BoE

Today’s attention shifts to the BoE, which is expected to raise interest rates by 25 basis points in what will be the fourth straight meeting of hikes. Investors will be paying attention to the vote after there was one dissenter, Jon Cunliffe, last month, and as concerns grow, the UK could be heading towards a recession.

A 25 basis point rate hike will take the benchmark lending rate to 1%, the highest level in over a decade. This is also the threshold that the BoE has marked for starting its sales of gilts which have built up on the balance sheet across the pandemic. Active sale of gilts, rather than them rolling off the balance sheet, is a significantly more hawkish step by the central bank, which could boost GBP/USD back towards 1.27 and would likely roil the equity markets. However, the BoE has also said that stable market conditions were necessary for such a move, and we don’t appear to be there yet.

BoE policymakers have been sounding more cautious recently, with the BoE governor reining in his language for further rate hikes as the cost of living crisis engulfs the UK.

GBPUSD rallied 1% yesterday on Fed-inspired USD weakness but is down 0.5% at the time of writing, around 1.2550. A dovish tone from the central bank could send the pair back below 1.25.

OPEC+

Oil prices surged 5% in the previous session after the EU unveiled plans to phase in a Russian oil embargo over the course of 6 months. The sanctions proposed by EC President Ursula von der Leyen need the backing of all 27 EU countries, which could be a challenge, given Hungary and Slovakia’s opposition. Still, the prospect of a tighter oil supply boosted oil prices yesterday, and they continue rising today.

OPEC+ will meet today, but they are unlikely to deviate from the previously agreed 430k bpd increase, insisting that the problem in the oil market is a geopolitical issue rather than a supply issue.

Disclaimer: This article is not investment advice or an investment recommendation and should not be considered as such. The information above is not an invitation to trade and it does not guarantee or predict future performance. The investor is solely responsible for the risk of their decisions. The analysis and commentary presented do not include any consideration of your personal investment objectives, financial circumstances, or needs.

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