Kristal Daily Market Update Mar 17

Price action was very conclusively risk-on yesterday as the Fed raised rates by 25 bps as expected. Details on the tapering of the (almost USD 9tn) balance sheet are expected as soon as May, Powell did not rule out a 50 bp hike in the future and the dot plot indicated a further six 25 bp hikes in 2022. This would be followed by three to four hikes in 2023 before paring back to boost growth, per the FOMC members' expectations. Market participants had a tough go on the day though with almost all intuition going out the window. In a likely case of buying the rumor and selling the fact, nonprofitable Tech companies led gains on a day when the central bank turned even more hawkish than expected. The US yield curve flattened again with the 5Y and 10Y yields now almost the same and the 2Y not far behind. Inflation break-evens did come off a little on the day, albeit from elevated levels.

The sentiment was in full swing well before the Fed though. In Asia, HK halted its steep selloff as the Chinese government made public statements about supporting the economy in the first quarter. Most analysts see the Chinese equity selloff as self-inflicted, driven by opaque regulatory crackdowns, and should the govt choose to do so, they ought to be able to restore confidence and inflows as the bargain hunters start stepping in. The Hang Send index gained 9% on the day yesterday and gapped higher by another 4.5% on open today. Europe continued to keep the ball rolling with most major indices up over 3% with the Fed coming in for the grand finale.

Vol was lower across equities and FX with safe havens like the US dollar, JPY, CHF, Gold all falling back on the day. Crude was flat but the 100 support level is unlikely to hold for Brent as it appears to be slowly giving way. US inventory data overnight was bearish too with inventory far exceeding expectations. European commodity (particularly energy) traders have requested emergency financial assistance from their govts to help ensure the smooth functioning of energy markets - owing to recent volatility and margin calls. Trafigura has even approached the big private equity firms for a cash infusion. The LME will extend the limit down trigger from 5% to 8% for Nickel futures today to help the market discover its true price once again. Also ahead today, the BoE is expected to hike by 25 bps as well, while central banks in Taiwan and Indonesia are expected to hold.

Have a great day ahead

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Warren Buffett