Equities are revelling in the wake of the FOMC minutes after the Fed telegraphs a downshift from jumbo to extra-large rate hikes. Although we’ll see a slower pace of rate hikes, the terminal rate will be higher than markets had anticipated.
Still, investors have welcomed a perceived reduction in uncertainty around the Fed’s terminal rate. The tail risk of tightening much above 5% has been substantially reduced on the back of a much better October CPI report. Into year-end, positive global risk sentiment could easily persist, mainly if there is another good inflation reading for November.
Oil prices had steadied earlier this week, as fears about the effect of China’s Covid surge and subsequent snap lockdowns were primarily offset by concern about oil supply ahead of the EU embargo on Russian crude.
However, a G7 price cap is reportedly being considered in the $65-70/b range, higher than expected and similar to the discount Russian crude trades. Hence traders pared longs, thinking the cap would have little bite to impact Russian Crude exports materially.
There is also a 45-day grace period, allowing crude loaded on the day the EU embargo takes effect (December 5) to be sold for delivery as late as mid-January.
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All of which suggests a much less significant hit to pre-year-end Russian crude supply.
The dollar is falling as US Treasuries and equity markets rally, even though nothing was new in the minutes. But with rates volatility diminishing, a dynamic that has been USD-positive through 2022, the window is open for more dollar sales into year-end, provided risk sails on an even keel.