US and European stock futures are indicating a slow start as investors are trying to make full sense of Jay Powell’s message yesterday. The Fed increased the interest rate by 25 basis points as per expectations but, to a large extent, closed the door for any further rate hikes. The comments pretty much indicated that the rate hike cycle is paused, but the stock market in the US didn’t perform according to the textbook trade, and investors are confused about why we have not seen a stellar rally.
PacWest Folding Its Cards?
The reason is simple: the Fed pausing the rate hike cycle is certainly music to many investors’ ears, but not when the threat of a possible recession taking place becomes a serious one, and in addition to this, we have serious chances that another regional bank is going to fall into the hands of Wall Street giants. The Fed’s monetary policy made three US banks fold their cards, and JP Morgan Chase is the biggest winner. Yesterday in the after-market hours, we saw PacWest Bank’s shares tumble as it seems that it is ready for a new banner on its door step—the bank is looking for a possible buyer, and we believe that this time it could be Bank of America as JP Morgan already owns more than 10% of US depositors’ money.
Fed’s Monetary Policy
The question that is troubling traders today is that yes, the Fed has paused their interest rate cycle, but the Fed maintains their narrative as the US Treasury, that the US banking system is very stable and robust. However, facts are stating something completely different—three regional banks no longer exist, and how many more are going to see the sun set on their operations? More importantly, for how long are we going to see bailouts or so-called strategic buyouts? The reality is that rates in the US are at a level that is causing enormous pain, and inflation continues to remain sticky. Now that the Fed has paused the interest rate hike cycle, what will happen to inflation? Surely, if we do not see any further improvement in the inflation readings or, even worse, if we see inflation ticking higher as energy prices are still well above their COVID or pre-war era, we could be in a lot of trouble.
Shell’s Earnings
Speaking of the energy sector, Shell, the energy giant, is expected to report its quarterly earnings today, and what is expected from the company is to continue to meet its commitments on both ends. Firstly, shareholders want to get rewarded in terms of share buybacks, and we are likely to see that in its earnings.
ECB’s Monetary Policy
In Europe, the conversations are going to be focused on the ECB’s meeting; the bank is set to increase the interest rate by 25 basis points, following the footsteps of the Fed. However, the inflation and economic situation in Europe are very different. Traders would like to know the future direction of the ECB’s monetary policy; we think that this isn’t going to be the last interest rate hike that we will see from the ECB, as there will be at least one more interest rate hike in the pipeline. Economic data continues to suggest that the ECB doesn’t need to be overly concerned about the economic crisis and can continue to focus on price stability. Looking at the Euro, one thing becomes clear, and that is that the dollar index is on the ropes.
Gold Price Today
As for the precious metal, it continues to march higher as the dollar index loses more steam, and today we have seen the price flirting with another important price level of $2050. Traders believe that they have a real shot at recording another all-time high as the Fed has finally thrown in the towel on the interest rate hike agenda. However, it is important not to underestimate the Fed, as it can and will change its narrative fairly swiftly if inflation doesn’t tame.
Oil Prices Today
In terms of oil prices, we saw serious selling pressure yesterday as both crude and Brent oil prices dropped significantly. Traders are worried that the biggest economy in the world, the US, is heading towards an economic crisis, and it is highly likely that we will see oil demand easing off.
