Powell to follow Volcker, oil traders quick to take profits

Stephen Innes SPI Asset Management

Markets

With the market sensing that a hawkish FED knows full well they are behind the curve and have little option but to step on the rate hike pedal, a significant repricing has gone through the front-end market in the US afternoon. The Fed Fund strip is pricing 70bp for the next two Fed meetings.

The capitulatory risk unfriendly result of the markets having to price the potential that Powell will have to follow Volcker – raise rates to such a level that the economy materially weakens; the S&P 500 fell 3.87% Monday and is now down 22% from its December 29 peak. Monday's close was the lowest since January 29, 2021.

Worth noting Energy is among the worst-performing sectors(XOP -6.23%) - considering the industry has been perceived as "safest" right now, given the fundamental background. If you are looking for more signs of capitulation, Energy is probably the most obvious, given it was one of the last bastions for survival management

Oil

Crude is acting better now than it did during yesterday's Asia session but off intraday highs. Discussion within the oil complex still revolve around Libya's decline in production, China continuing to impose measures to slow the spread of Covid, and concerns around global recession woes driving demand destruction.

Despite the headwinds, my sense is most of the conversations are still positive medium/long-term for crude. Still, after a 55% jump in oil prices this year, it makes sense that investors are increasingly concerned with downside risks and are quick to take profits so far this week.

Author

Stephen Innes

SPI Asset Management

With more than 25 years of experience, Stephen has a deep-seated knowledge of G10 and Asian currency markets as well as precious metal and oil markets.

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