The markets are seeing a new landscape after the Fed chairman's speech and the OPEC decision. These were key events for the financial markets. The upcoming data reading from the US labor market may be of the same caliber.
Both U.S. stock index futures and European stock indexes are trading in the red following Thursday's speech by Jerome Powell, Chairman of the U.S. Federal Reserve. European indexes seemed to lose ground on Friday. Germany's DAX 30 in Frankfurt is down more than 1 percent, all seemingly on concerns about rising bond yields and inflationary pressures looming in the U.S. and around the world.
Jerome Powell said Thursday that the central bank's stance is appropriate despite the recent bond sell-off, and that reopening the economy could temporarily spur inflation. Investors were expecting the Fed chief to signal a willingness to increase long-term bond purchases to keep market interest rates low. The market was talking more and more about possibly signaling a resumption of Operation Twist. However, nothing of the sort has happened, which may cause further panic among investors.
It could be summarized that the market expects the Fed to stimulate all the time and bail out in any situation. It may also have to do with the fact that US companies are heavily leveraged with credit and bonds, so rising interest rates are not good for their business. Meanwhile, the Fed may think that since there is an improvement going on in the economy, companies will do better or worse with an increase in interest rates. Still, it's important to remember that as the bond and stock markets fall, investors' cash positions rise, and that could mean they look for more investment opportunities because it doesn't pay to hold cash.
Oil. Production cuts, price rises
The situation on the crude oil market is different. On Friday, oil prices continued to rise, extending their third session of gains. This may have been helped by OPEC+'s decision to maintain current production levels in April as well, with Saudi Arabia extending its unilateral production cut of 1 million barrels per day indefinitely. Only Russia and Kazakhstan received 130,000 barrels per day and 20,000 barrels per day production increases, respectively, S&P Global Platts reported. The market was expecting an increase in production of 500,000 barrels per day, which could also contribute to oil price hikes on global markets. The price of a barrel of WTI has already reached almost $65.
Which currencies are losing to the dollar?
On the currency market we may observe the strengthening of the US dollar. This may be caused mainly by the fact that the interest rate on the US debt is growing faster than in other countries of the world, which translates into an increase in spreads on the bond market. This may attract foreign capital away from the US, which in turn may cause selling of euros, yen or francs in favor of the USD. Hence, the foreign exchange market, along with the stock and bond markets, has also become dependent on further Fed actions.
Daniel Kostecki, Chief Analyst Conotoxia Ltd.
Materials, analysis and opinions contained, referenced or provided herein are intended solely for informational and educational purposes. Personal opinion of the author does not represent and should not be constructed as a statement or an investment advice made by Conotoxia Ltd. All indiscriminate reliance on illustrative or informational materials may lead to losses. Past performance is not a reliable indicator of future results.
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