Focus on FOMC Minutes

European markets were mostly flat; the Stoxx600 remained close to its 50-DMA, while the FTSE 100 remained offered near its 200-DMA, near the 7544 level. The FTSE has been one of the biggest laggards of the year, as capital flew into the tech stocks. The slow Chinese reopening and the crumbling commodity prices didn’t help FTSE extend the last year’s outperformance to this year. Happily, more rate hikes from the Bank of England (BoE) and the darkening economic and political picture for the UK is not a cause for concern for the British blue-chip index. A major part of their revenue comes from outside the UK. Therefore, a rotation from tech to value could throw a floor under the FTSE100’s selloff near the 7300 level if of course we don’t see a global selloff due to recession and hawkish central banks-

OPEC meets industry heads

The barrel of oil remains sold near the 50-DMA as OPEC meeting with industry heads is due today. Everything that involves OPEC is an upside risk to oil prices. Yet any OPEC-related rally will attract top sellers and won’t let OPEC reach stability around $80pb level. The major medium-term risk is that the unresponsive price action could hide a worsening global glut that could hit suddenly in the H2, and send oil prices higher. Until then, bears will keep selling.

Fed releases minutes

The Federal Reserve (Fed) will release the minutes of its latest policy meeting today, and there will clearly be a couple of hawkish sentences that will hit the headlines, given that the Fed officials paused their rate hikes in their June meeting, but their dot plot showed two more interest rate hikes before a real and a longer pause.

At this point, the Fed expectations went so hawkish that there is a growing chance of correction. Fed funds futures gives near 90% chance for a another 25bp hike in July, and another 25bp after that is more likely than not. No one expects or is positioned for a rate cut from the Fed this year. Unless there is another baking stress or chaos in the housing market, nothing could stop the Fed from pursuing its battle against inflation. And interestingly, Bloomberg research found out that interest rate increases in the US are benefitting savers more than they are costing mortgage payers, because many mortgages are on fixed rates for 30-years and they have yet to expire.

Housing cracks

Note that that’s not the case elsewhere. The UK, Hong Kong and Commonwealth countries including Canada, Australia and New Zealand are the most vulnerable to the cracks in the housing market because the share of houses bought on mortgages on shorter-term fixed rates or variable rates are higher. In New Zealand, for example, house prices fell the most in 8 months in June and are down by more than 10% since a year earlier.

Interestingly, the US dollar index remains broadly unresponsive to the Fed’s hawkishness, but against the greenback could perform better against the Aussie, Kiwi, sterling, and the Loonie in the second half, because the central banks of all the cited countries will have to sit down and think of broader economic implications of a full-blast housing crisis. History shows that, going back to the 1990s’ Japan, where the Bank of Japan (BoJ) raised rates to halt the housing bubble, and which then triggered a real estate crisis, the implications were a long and dark tunnel of asset devaluation, reduced consumer spending, bankruptcies, a weakened banking sector, deflation, and long-term economic stagnation. That’s certainly why Japan prefers letting inflation run hot, rather than hiking the rates and send the country to another, and a very sticky deflationary phase.

USD/JPY capped near 145

And speaking of Japan, the rally in dollar-yen remains capped at 145 level. The only direction that the BoJ could take from here is the hawkish path, therefore turning long yen will, at some point, become a star trade. Yet getting the timing right is crucial and it all depends on a greenlight from the BoJ.