How do you trade the Fed?

How do you trade the Fed? Not easily, is the simple answer. US has ripped higher as the Fed signalled it won’t let inflation run riot, but bonds have been pretty steady – 10yr yields have slipped back under 1.48%. Stocks have come off their record highs since the Wednesday meeting, but yesterday the Nasdaq Composite – composed of tech and growth companies that ought to do less well in a rising rate environment - gained 0.87%. That may be becintause investors are retreating to a form of quality right now. NDX rose 1.3% as the mega tech names enjoyed solid gains. The broader market was weaker with small caps -1%, commodities slipped with palladium -10%, platinum -7%, oil lower and the dollar was bid up to its best day in over a year.

European indices saw a mixed start to the session on Friday but have mostly turned red as investors dial down their risk in the wake of the Fed’s slightly hawkish meeting. What the Fed’s meeting also told us was that once inflation expectations become unanchored, it’s a tough job to re-anchor them. I continue to envisage higher yields by the end of the year but the Bank of America Flow Show report today stresses that cyclicals face a ‘perfect storm, with ‘excess positioning, China tightening, US fiscal hopes fading, and now hawkish Fed’ combining against them.  Metals are a tad firmer this morning after steep losses Thursday, but copper is still ~14% off its recent peak and set for its worst week in 15 months. A combination of a tighter Fed and China’s efforts to lower prices have worked. Gold is also set for its steepest weekly loss in more than a year as a stronger dollar and Fed’s hit job on inflation works its way through some stretched speculative longs.

UK retail sales indicated the direction of the post-pandemic economy. Sales fell 1.4% between April and May as shoppers ditched stuff for experiences, dining out more and hitting the pub again. Tesco Q1 numbers this morning evidence this, with the company reporting that sales growth peaked in March at +14.6% and moderated in April/May as restrictions eased.  Tesco is starting to hit some extremely tough comparisons with last year’s pandemic-driven surge in sales. Shares in the retailer declined more than 1% towards the bottom of the FTSE 100. 

Dollar strength continues to dominate the FX narrative in the wake of the Fed. GBPUSD is lower again with a break of the 100-day moving average to 1.3860.  The washing out of longs maybe has some way to go yet and a test of the April double bottom at 1.3660 may be on if there is further for this to correct. Fairly stretched GBP longs and shorts on the USD mean this could have further to unwind. USDJPY trades lower at 110 support after the BoJ kept monetary policy unchanged and extended its pandemic relief programme. EURUSD is also on the back foot and trying to hold onto the 61.8% retracement of the Mar-May rally around 1.1920. AUDUSD is through the April low and testing the 200-day SMA at 0.7550. Very light data day but EU finance ministers are meeting for the second day in Brussels.  

Shares in EasyJet, Ryanair and Wizz Air all rose after an upgrade for budget airlines from HSBC, which says ‘the process of reopening borders and enabling travel is assuming momentum within the EU, and the UK may follow’. EasyJet and Ryanair were both upgraded to buy from hold, whilst Wizz was given a hold rating having previously held a reduce tag. HSBC adds that whilst UK policy is ‘not easily predicted’ (you don’t say), it expects UK travel restrictions to ease.