As Geopolitical Premium Declines, Markets Become Increasingly Focused on Fed’s Next Move

32686 as geopolitical premium declines markets become increasingly focused on feds next move

Equity markets are on the rise on Wednesday as bullish momentum stretched for the second day in a row, at the same time, defensive assets, bonds and gold lost their footing amid a marked de-escalation of the Ukrainian conflict, although the West is expressing skepticism about the partial retreat of Russian troops from the Ukrainian border.The MSCI Global Equity Index rose 0.4% on Wednesday, continuing Tuesday’s rally, during which the index gained 1.3%. Despite hype in the media, geopolitical risks were indeed priced into asset prices: after the news that Moscow was withdrawing troops from the border, SPX futures jumped by about 1%:If the de-escalation continues, a decrease in the geopolitical premium should first of all be expected in European stocks, gold, and also the ruble. Given the high oil prices and the high key rate of the Central Bank of the Russian Federation, it is highly likely that ruble upside will continue. The only obstacle to this may be an overly aggressive pace of tightening the Fed’s policy.Forex is calm today, volatility is low, major pairs are traded in a narrow range. Markets are waiting for new macro updates. British inflation in January came out higher than expected, headline and core inflation exceeded the forecast by 0.1% and amounted to 4.4% and 5.5% respectively. Together with yesterday’s employment data, which also came in better than expected, markets are pricing in as many as six rate hikes this year. The next one should take place in March; the markets are almost confident in this outcome. Given that the panic that the Fed will raise rates by 50 bp. in March somewhat eased (judging by rate futures market), repricing of expectations on tightening path of the Bank of England is likely to allow the GBP to resume the rally. From the point of view of technical analysis, a favorable signal for this is relative stabilization of GBPUSD with support at 1.35 (within the medium-term uptrend), which indicates an established short-term equilibrium of expectations regarding how the interest rate differential will change:According to a Reuters poll, a quarter of those polled considered a 50 bp Fed rate hike more likely. Most believe that the Fed will be more cautious and raise rates by 25 bp.Producer inflation in the US beat forecast (1% vs. 0.5% expected). This indicator is leading for consumer inflation, so basically markets received the first signal that inflation will remain stable in February.Yields on 10-year bonds are stabilizing around 2%, 2-year rates trade flat hovering near 1.6%. This suggests that most part of expectations on the Fed’s policy have been priced in and in the absence of new unexpected data from the macro front, downside correction in rates is likely.US retail sales, due out today, are expected to rise 2%. The focus is on the sales of cars, the prices of which have recently been making the main contribution to consumer inflation and somewhat distorting the headline indicator. A slowdown in car sales may be the first signal that consumer buying frenzy has peaked and expectations of more moderate inflation in the near future will be justified. Actually, positive for the market (in terms of less aggressive tightening of the Fed’s policy at the upcoming meeting) will be worse-than expected growth of the headline reading and better-than-expect growth of core sales (which doesn’t include cars and fuel).

Source: Tickmill

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