Overnight Headlines

*USD rallied strongly after Fed considers “talking taper” at April meeting

*US equities recovered off their lows to close near the highs, Vix above 22

*Bitcoin experienced huge volatility, off nearly 30% before clawing back losses to 8%

US equities gyrated to the beat of the intraday digital asset volatility with risk off pushing equities lower before a strong bounce into the close saw indices finish at their highs with minimal losses. Tech was the only sector higher with growth outperforming. Asia is a mixed bag this morning, but European futures are higher.

USD hauled itself off its recent lows as yields rose following the release of the FOMC minutes. The risk off sentiment in the digital asset space which fed through to equities for most of the day pushed DXY to 90.19, the biggest percentage gain in over a week and wiped out Tuesday’s loss when the dollar index had its first sub-90 close since the start of January. EUR/USD is being supported by last week’s highs.

Market Thoughts – Fed hints, but no action yet

Last night’s FOMC minutes of its April meeting showed that officials may reconsider their policy if there is ‘rapid progress’ towards the committee’s goals. However, participants agreed that the economy is still far from those objectives. In essence, the Fed is potentially a few meetings away from starting to discuss ‘a plan for adjusting the pace of asset purchases’ which could entail a shifting of rhetoric after the summer if several strong job reports have been seen.

The jump in bond yields was indicative of a market which is ahead of the Fed and pushing for some action soon. That said, the minutes are stale in so far as we’ve had a very weak NFP since, plus the telegraphed strong inflation report, so much will depend on the May jobs report released in the first week of June. This will be a pivotal moment as the potential start to resolve the Fed dilemma which then has a meeting in June where the Fed update their projections and dot plot of the path for interest rates.

Chart of the Day – Buy the dip…

The key theme for stock markets has been the battle between value and growth, which in basic terms is the S&P500 versus the Nasdaq 100. The ongoing spike in inflation pushes investors out of growth and tech stocks as higher inflation will hurt the expected value of their real future earnings. This is already clear in the year-to-date performance of the two markets with the S&P 500 up close to 10% against the tech-laden Nasdaq’s 2%. The question going forward is whether the tech titans ultimately push down the whole of the market or this rotation is more orderly as the global economy recovers.

In the near-term, the S&P500 has seen strong dip buying recently with last Wednesday’s sharp selloff an isolated event, but which tapped the lower Keltner band. Even yesterday’s wild ride in digital coins which also impacted on stocks saw a strong bid which saw a near flat close in the S&P. The long term trendline from the pandemic lows is acting as good support along with the 50-day SMA. If prices break down, then the March highs around 4,000 are the next major level of support.