We thought that the Federal Reserve (Fed) decision would be the highlight of yesterday but news from Russia came to eclipse the FOMC.  

Vladimir Putin declared partially mobilization yesterday morning. Russia is preparing to mobilize 300’000 reservists. It’s a major escalation of the war, because so far, the Russians deployed around 150-200’000 soldiers. So, sending 300’000 more men is a big deal.  

But, many experts think that 300’000 extra men would unlikely be sufficient to reverse Ukraine’s momentum. Some also point that the problem for Russia is not necessarily ‘the capacity of soldiers but the capacity of supply them with weapons’. At this point, no one knows how the things will turn out. But tensions in Ukraine are escalating, and nuclear threat is the cherry on top. 

Putin’s announcement, which fell like a bomb on investors who were already stressed out due to the Fed decision, sent capital to safe haven assets yesterday. The safest of all safe havens, the US dollar, spiked to 111.80. Gold made an attempt to $1688 per ounce, but gains remained short-lived as the dollar’s strength outweighed, and gold is back to the levels it was trading at yesterday morning.  

Powell, the joykiller

The Fed delivered the third 75bp hike yesterday, as expected. Markets cheered the decision, as a 75bp hike is better than a 100bp hike. 

The S&P500 was even trading 1.3% up when the decision fell but then, Jerome Powell came to kill joy. He said ‘we have got to get inflation behind us. I wish there were a painless way to do that. There isn’t.’  

So? The US economy must slow, and jobs must be lost to get inflation down.  

The dot plot revealed that the officials’ rate projections went well above the market expectations. Most of them favour sending the rates above 4.25% by the end of the year; that means that there must be at least another 75bp hike on the pipeline.  

Then, if we are lucky, we could end the year with a 50bp hike, which could be followed by a couple of 25bp hikes before the Fed stops and takes a breather.  

It's needless to say that equity traders didn’t like what they heard. The S&P500 closed the session 1.70% lower and is again more than 20% down compared with its January peak and Nasdaq tanked 1.80%.  

‘Ugly’ is a good word to describe the market mood this morning. The selloff will likely continue.  

What’s cooking in others’ kitchen? 

The Bank of Japan (BoJ) maintained its policy unchanged, and is not unpleased seeing inflation rise to around 3%. BoJ head Kuroda believes that it will be transitory. (Wait, transitory? We already watched that film, haven’t we?!)¨ 

Anyway, if the Japanese are not uncomfy with rising inflation, they sure are with the free-falling yen. This is why, if the dollar extends rally, we will probably see the BoJ step in to give some relief to the yen. The USDJPY is again flirting with the 145 level, but betting against yen could be risky due to the intervention threat. 

Another place where inflation is also around 3%, 3.5% to be precise, is Switzerland. But I can tell you that the Swiss don’t like inflation and they will do their best to tame it. The SNB is expected to hike by 75bp today. Some even bet that the SNB could surprise with a 100bp to bolster the franc, and neutralize the impact if strong USD on inflation. 

Elsewhere, the Bank of England (BoE) could opt for a 50bp hike, instead of 75bp at today’s meeting.  

Yes, increased spending from Liz Truss government is no good for inflation, BUT, because the £40 billion energy package aims to tame inflation – and it certainly will, the BoE could take it easy on the rate front.  

The BoE is also expected to announce quantitative tightening, but the effect of QT will certainly remain under the shadow of huge sums that Truss government is preparing to spend. On top of the energy spending, there could be a £30 billion tax cuts, and also a stamp duty cut. It is said that the Chancellor of Exchequer will certainly need a bigger box to finance all that.  

What does it mean for the markets? It means that the UK gilts will probably further dive, and the sterling will end up hitting parity against the US dollar.   

And finally, Turkey will also announce its policy decision today. Well, you know what I think about the Turkish policy rates right? They are at meaningless levels.  

Official inflation in Turkey is above 80%, unofficial inflation is above 180%, while the policy rate is at… 13%. The Central Bank of Turkey (CBT) cut its rates by 100bp at last meeting - a shocker. The dollar-try pushes steadily toward the 20 mark, as the central bank puts all its weight to keep the exchange rate as steady as possible. It burns money, it is time bomb, but you can’t really trade it, as the lira doesn’t depreciate fast enough to cover the cost of being short the lira.  

What’s worrying however is the fact that the Turkish stocks have come under a decent selling pressure recently. So far, the Borsa Istanbul has been rising despite the falling lira, as the Turkish companies keep their valuation somehow stable in terms of US dollars. But of course, the spiking inflation, the spiking energy prices, and looming global recession weigh on sentiment, and the selloff last week triggered margin calls, which resulted in a sharp decline in Borsa Istanbul stocks.  

Turkish banks, which got a big hit last week, are now buying back stocks to calm down the selling pressure.  

Could the recent downturn be reversed? I believe yes, as Turkish investors don’t have many options to fight the soaring inflation, as the dollar is kept steady, and the bank fiduciary rates are abnormally low.

This report has been prepared by Swissquote Bank Ltd and is solely been published for informational purposes and is not to be construed as a solicitation or an offer to buy or sell any currency or any other financial instrument. Views expressed in this report may be subject to change without prior notice and may differ or be contrary to opinions expressed by Swissquote Bank Ltd personnel at any given time. Swissquote Bank Ltd is under no obligation to update or keep current the information herein, the report should not be regarded by recipients as a substitute for the exercise of their own judgment.

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