Overnight Headlines

*China stocks rebound as State Council vows market support   

*Oil climbs above $100 as ceasefire talks stoke volatile trading

*Dollar nears 5-year top to yen before Fed, yuan jumps on possible Saudi use

*Gold holds losses and trades around support at $1916/23

US equities rose after another tumble in oil eased inflationary concerns. The commodity is down 20% in the last five trading days. Tech led the rebound with the Nasdaq jumping 3.2%, erasing Monday’s loss. Growth outperformed value with energy the laggard. The Dow rose 1.8% and the S&P500 2.1%. Asian stocks are strong led by China and the Hang Seng. The latter has surged by 8% and is finding support from the 2016 low. Futures are firmly in the green.

USD is trying to consolidate for a third day around 99 ahead of the FOMC. EUR found resistance at 1.10 and pared gains to close at 1.0956. German investor confidence tumbled to its lowest in two years. GBP rose for the first time in four sessions, a strong labour market helping. The winning streak in USD/JPY continued as the pair hit a new cycle high at 118.45. AUD stabilised around 0.72 and the 50-day 100-day SMAs. USD/CNH spiked up to 6.40 before reversing. Reports suggest Saudi Arabia is in active discussion to price some of its oil sales in renminbi instead of dollars.

Market Thoughts – FOMC bigger than the conflict

We’ve written before that it is always wise to follow the underlying narrative in the market during times of extreme stress and conflict, even though this can be tough to do. The Fed is expected to hike by 25bps today as signalled by Chair Powell. Strong inflation pressures are likely to be fuelled by the protracted rise in commodity prices. But uncertainty over the Ukraine crisis could make the FOMC a touch more cautious, with a 50bp move off the table.

All eyes with be on the updated dots and projections. Markets will pay close attention to how much higher the dot plot goes (the “terminal rate”), and how much sooner. The market currently has a neutral top just under 2.5% by end-2023. The risk is a bias towards both higher and earlier than previously thought. A material upgrade of inflation forecasts is expected in the projections. Again, how high and how long is key. How durably they foresee lower unemployment will also inform the committee’s stance.

Chart of the Day – Overbought USD/JPY hits five-year highs

We mentioned this major briefly in the Week Ahead and a potential break to the upside towards 118. That has happened very quickly this week with Monday’s big advance and follow through buying. Ten-year US Treasury yields are hitting new highs again this morning at 2.169%. This instrument is highly correlated to USD/JPY.

Of course, FOMC is the focus with the market pricing in a cumulative 96bps of hikes over the next three meetings. That means one 50bp move either in May or June. This year sees the equivalent of 25bp hikes at every remaining meeting. USD/JPY is overbought on several indicators as it enjoys its eighth straight day of gains. Major resistance is 118.66. Support comes in just above 117 which is a long-term trendline.