The Fed battle against inflation | 04 February 2022

#SP500:

The Fed indicated a willingness to start shrinking it's nearly $9 trillion balance sheet, but that process would start after interest rate liftoff and through a predictable manner. While details on rate hikes and balance sheet runoff were scarce, Chairman Jerome Powell noted that “the FOMC is of mind to raise rates at the March meeting”. Powell said the Committee will be turning his attention to the details on the balance sheet construction process in subsequent meetings but would likely begin in the second half of the year. This is a negative signal for high-tech companies.

Trading recommendation: Sell 4485 and take profit 4312.

#WTI:

Oil prices are showing signs of overheating. Spot prices are climbing rapidly and the futures market has moved into one of the most extreme backwardations in the last three decades, a classic signal the market is expected to become very tight. If oil prices continue escalating, the major consuming economies will eventually slow of their own accord or their central banks will be forced to raise interest rates sharply to bring inflation back under control. The Federal Reserve plans to raise interest rates in March on the assumption the U.S. economy will largely steer clear of fallout from the Omicron variant of the coronavirus and keep growing at a healthy clip. This is a negative signal for oil prices.

Trading recommendation: Sell 88.50 and take profit 86.25.

XAUUSD:

The great unwinding of bloated central bank balance sheets could start as soon as this week. Bank of England is widely expected to hike UK interest rates for the second time in less than three months this Thursday and double its main policy rate to 0.5% in the process. In August, the Bank announced it would start reducing its balance sheet once base rates hit 0.5% - much lower than the 1.5% threshold it had flagged previously. The process of so-called 'quantitative tightening', or QT, will be passive at first - the Bank will simply stop re-investing coupon payments and maturing gilts and reduce its holdings as they come due. Outright selling of securities is probably some distance off and will probably depend on how markets react to passive QT first. This is a negative signal for gold.

Trading recommendation: Sell 1800.50 and take profit 1783.20.