Fed's greenlight for more rate hikes after stress test. Crude oil jumps on decline in US inventories, resistance at $70pb

Fed's got the greenlight for more hikes. US and European stocks were up on Wednesday. The US chipmakers dampened appetite across the Atlantic Ocean on news that the Biden Administration will bring more restrictions to the US chipmakers' exports toward China, but Nasdaq still eked out gains.  

Unfortunately for Nvidia, its A800 chips which were launched as a response to last year's export ban could be included in the new set of restrictions. Nvidia stock fell yesterday, but not as bad as premarket trading suggested. Taking a closer look to Nvidia's revenue per region, revenue slowed by around $2bn in China amid the chip export ban last year, but the fall in Chinese revenue was compensated with a doubling revenue for the US. This means that, even though the Chinese growth potential is weakened, there is potential to grow business for Nvidia. For others, AMD was almost flat, and Micron was up following an upbeat forecast for the current period amid the easing chip glut.  

Same, same 

The major central bankers' speeches were the same background music. The Federal Reserve's (Fed) Powell, the Bank of England's (BoE) Bailey, and the European Central Bank's (ECB) Lagarde agreed that their fight against inflation wasn't done yet, and that more rate hikes are on the pipeline.  

What was interesting however was that the Bank of Japan's (BoJ) Ueda didn't necessarily think that the Fed, the BoE and the ECB overtightened, while he, on his end, didn't move an inch to fight back inflation. What's even funnier is, Powell, Bailey and Lagarde acknowledged that their policy actions come with a lagging effect, but BoJ's Ueda joked saying that because Japan hasn't started hiking yet, the lag effect could be 'at least 25 years'. I don't know if it makes you laugh or cry, but it made the central bankers, and the yen shorts laugh. 

The dollar yen is now at the highest levels since November last year, a touch below the 145 mark, and on its way toward higher waters. Yet, a rapid and extended period of yen depreciation remains concerning for Japanese officials and could end up with direct FX intervention to halt bleeding. That's one risk that the short yen positions carry right now, as the yield differential plays clearly in favour of further yen selling.  

Elsewhere, sentiment in euro was weak yesterday on the back of a mixed set of data. The Italian PPI fell much slower than expected in May, but consumer price inflation eased more than expected. The ECB's money supply slowed, and loans to the private sector grew slower than expected as a sign of tighter credit due to higher rates. Germany will reveal its own inflation figures today, and we could see an uptick in German inflation according to a consensus of analyst expectations. It would be bad news for the ECB. So many hikes, and so many more promised by the ECB, and inflation is hanging around.  

It is because the Fed, ECB and BoE's balance sheets remain the elephant in the room, and they are the reason why economies don't react efficiently to interest rate hikes, and inflation doesn't slow at the desired speed. Yes, the Fed, ECB and BoJ's combined balance sheet size has been shrinking since last year, but total assets remain indisputably HIGH - almost 50% higher than pre-pandemic levels. So, you bet, the higher rates don't do much harm to the economy, except for those who have to renew their mortgages. 

For the ECB however, the fact that the cheap loans are drying out could achieve some faster results. But it could trigger a divergence between core and periphery, widen the spread between Germany and the periphery and the latter could slow down the euro's appreciation.  

Fed's stress test gives the greenlight for more hikes 

The US banks passed the Fed's stress test, giving a greenlight to the Fed for more rate hikes. The US banks gained in the afterhours trading, with Bank of America and Wells Fargo leading gains, but the new regulations regarding capital requirements will likely hold back investors from full heartedly going back to banks.  

Crude jumps 

Crude oil jumped off below the $67pb level on the back of an almost 10mio barrel decline in US crude inventories last week. There is now a triple bottom formation at around the $67pb level, and that could throw a floor under any short-term selloff in crude oil. But the $70pb resistance remains strong, and more offers are waiting into the 50-DMA, a touch below the $72pb level. The chances are that we will see some back and forth between $67 and $72 range, until one side gives in.