1 Minute Market Rundown – 18th August 2022

FOMC Remain Intent on Fighting Inflation
Equities Give Back Some Gains
UK Inflation Relentless
Crypto Touch Lower Overnight

The FOMC minutes released yesterday inherently saw the FED give with one hand and take away with the other. They agreed on the eventual need to dial back the pace of rate hikes in order to avoid hurting the economy – great! But, they also reiterated they are intent on fighting inflation and may need to tighten more than necessary to achieve price stability – not so great.

For this author who is missing those days of volatility we had a few weeks back, this was probably the most boring and unwanted outcome. It leaves the market exactly where it was ahead of the meeting – unsure and uninspired. My personal view is that this will see risk come under pressure in the next few sessions.

Equities have had a decent rally of late and the S&P’s inability to break through 4320 makes me believe we may see some more selling ahead of Jackson Hole next week. A move back below 4220 may well lead to a further extension lower. Powell is also giving very little away and I can understand why. He has left the FED data dependent whilst also letting the market know they can’t be surprised if they decide to hike 75bps. With the possibility of large hikes still out there and inflation still on a rampage it is tough to
see this equity rally continue unabated as it has.

As such I am happy to run the same positions I have had on the last couple of days. Currently the desk sits short EUR/USD and GBP/USD and it is the latter that I feel has the most room to move in the current environment. Headline UK CPI out yesterday showed inflation was above 10% YoY. Throw into the mix a BoE unwilling to aggressively tighten and the UK is the perfect definition of a Stagflationary environment. I am happy to buy into risk (equities and crypto) dips for now. With increased dollar scrutiny, crosses have become a cleaner prospect. CAD/JPY is an interesting case – Canada has the second largest oil reserves in the world and Japan imports 99% of its oil, leading to a strong positive correlation between oil prices and CAD/JPY. As oil prices have come off in recent weeks, a divergence has opened up, with CAD looking overvalued. Of course Canada has been aggressive in their monetary stance, but with levels of private sector debt so high and such an overheated property market, whether they have the room to continue here is uncertain. Eerily, comparable levels of private debt have been seen before….in Japan in 1990. We sit short, but looking to sell any further rallies towards 105 CAD/JPY.

Crypto continues to trade in a tight range. ETH and BTC both came off a little overnight as Asian stocks turned south.. The levels in the majors are well defined and we need to see BTC and ETH above $25200 and $2050 respectively whilst $22500 and $1750 offers support. As with traditional markets, everything looks a bit tired and we may well see a bit of profit taking followed by consolidation before a pick up next month.

As always, good luck out there.

Lux Thiagarajah – Head of Markets

1 Minute Market Rundown – 18th August 2022

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