Swissquote Bank: Fed is dovish, next BoE and OPEC decide

November 4, 2021

By Ipek Ozkardeskaya, Senior Analyst at Swissquote Bank

Major US indices rallied to fresh record yet, again, because the tapering announcement from the Fed on Wednesday was rather dovish.

From this month onwards, the Fed will be buying $ 15 billion less of treasuries and MBS, but the average American will unlikely feel the difference of the latter policy change, except from a slight pressure on mortgage rates says Bloomberg.

The buying of bonds should come to an end sometime by mid-2022, but until that day, the Fed will continue expanding its balance sheet to record levels, and that will continue backing the inflation pressures, and the stock markets!

So we can comfortably expect to see the record rally in US equities to extend, because a growing number of average households will be attracted to the stock markets as that’s going to be the only way to help them keeping up with inflation rising at a speed of more than 5% annually. In other words, the best way to fight against the rising diaper prices, is to buy the P&G shares, or perhaps Bitcoin.

So, the risk is on and people continue hunting for the next big daily bargain, and new IPOs are excellent candidates for a try. Yesterday, the sustainable, wool shoes maker Allbirds went public, and it had a good first day, the stock price more than doubled, and closed the session up by 93%. Not bad at all. The next most-watched IPO is next week’s Rivian, which is a Ford and Amazon-backed electric car maker.

We have two important events on today’s macro calendar. One is the Bank of England (BoE) meeting, and the other is the OPEC decision.

OPEC is under a growing pressure from the US, Japan and others to boost supply to help easing the global energy crisis. There is little chance that Saudis will give in to that pressure in my opinion, but there is still hope to see them increase supply by a little bit more than the actual 400’000 bpd, to make a little bit more money and help us spend a better winter, without of course letting the prices fall by much.

The only thing that worries me a little is that the potential above the $ 85 has been limited in the US crude, and we see a growing pressure for testing the levels below the $80pb. Yesterday, the major catalyzer of the decline has been a bigger build in the US inventories.

The most recent EIA data showed that the US crude stockpiles increased by 3.3 million barrels versus some 2-million-barrel rise penciled in by analysts. Normally, during a strong trend, the bulls see the latter as an opportunity to buy the dip, but the short-term direction will sure depend on how OPEC is willing to play next.

The BoE will be meeting on Thursday, and the official expectations is a no change. But the activity on the MPC SONIA futures a different story, with a slightly higher probability of seeing the first rate hike happen as soon as today, to tame the rising inflationary pressures.

And if it is not today, it will probably be the next MPC meeting, where the market prices in less than 15% chances of seeing the rates stay at the current levels. With all this, will we finally see the pound gain against the US dollar? The risks are clearly tilted to the upside for the pound, if nothing, due to the divergence between a cautiously hawkish Fed, and a perhaps more daringly hawkish BoE.