The Fed is about to tighten monetary policy | 06 May 2022

#SP500:

U.S. equity funds witnessed a third weekly outflow in the week to April 30 as investors worried about slowing global growth and a more aggressive Federal Reserve. U.S. investors exited equity funds worth a net $10.55 billion, which was a 34% lower weekly outflow, compared with the previous week. U.S. large-cap equity funds drew their first weekly inflow in three weeks, worth $698 million, but mid- and small-cap focused funds posted $1.67 billion and $1.74 billion, respectively, in outflows. U.S. growth funds faced massive outflows for a third consecutive week, amounting $5.13 billion, while value funds had about $2 billion worth of net outgo.

Trading recommendation: sell 4190 and take profit 4077.

#WTI:

For the first time this year, traders are pricing in a near-equal chance that Fed policy makers in June will raise their benchmark rate by 75 basis points, following the half-point move that’s expected at their meeting next week. The Fed hasn’t done a 75-basis-point increase since the aggressive tightening cycle of 1994 that was followed by modest rate cuts in 1995 amid a steady economic expansion. Swap contracts for June were pricing in 115 basis points of tightening, 11 basis points beyond the full percentage point of hikes already expected in May and June combined. Earlier last week, 106 basis points were priced in. This is a positive signal for the dollar and a negative signal for oil, since assets have an inverse correlation.

Trading recommendation: sell 105.44 and take profit 102.97

XAUUSD:

The Federal Reserve is expected to approve plans this week to reduce a nearly $9 trillion balance sheet that ballooned as part of its efforts to fight the pandemic recession. Yields on the government bonds most sensitive to expectations for how the Fed may cull its balance sheet have swung wildly in the past week, and measures of fixed-income market volatility are near their highest since the onset two years ago of the coronavirus pandemic, which set the central bank on its bond-buying spree in the first place. The Fed is about to tighten monetary policy in a two-fisted way that has never been attempted with such intensity - raising interest rates in larger, half-percentage-point increments for the first time in 22 years, shifting in what may be record time from interest rates meant to boost the economy to a "neutral" stance, and allowing its balance sheet to shrink by as much as $95 billion per month likely beginning in June.

Trading recommendation: sell 1919.50 and take profit 1887.13