MARKET

U.S. stocks closed solidly higher on Monday, rallying 2% into the close after being down 1.7 %, with large-cap tech shares staging a late rally to close out a volatile session even as traders anticipate the Federal Reserve's most significant rate hike in more than two decades later this week.

 With a 50bp hike to the target range all but certain, the press conference will provide important colour around the prospects of a soft landing, the neutral fed funds rate and balance sheet normalization. One question on everyone's mind: Are 75bp increments on the table?

OIL

Crude prices are up after comments from Germany's economy minister, which noted that the E.U. plans to ban Russian oil imports either immediately or in a few months.

In addition, oil prices found support from surging refined products markets, offsetting threats to China's fuel demand outlook stemming from its stringent measures to curb Covid-19.

Of course, something as an oil embargo may seem simple, but the details are complicated and likely to cause problems figuring out how to wean off Russian oil without causing a massive oil price spike.

Fortunately, peak heating season is in the rear window, but that does not solve the issue of backfilling the Russian barrels' loss, which suggests the E.U. will continue to stall, hoping U.S. shale production returns to pre Covid level and OPEC catches up with quotas to at least mitigate some of the shortfalls. 

GOLD

Gold is coming under pressure as markets anticipate Fed tightening, and downward pressure is likely to linger until we clear the Fed meeting.

It was certainly not hard to get the golden ball rolling downhill ahead of this week's FOMC as Chair Powell could cement the view that 50 is the new 25, but more worrying for gold buyers, there are lots of Q.E. unwind. So, the question is, how much of the impact of the balance sheet runoff has the gold meltdown pulled forward.

FOREX

Over the past two weeks, the market has added two more hikes and now expects fed funds of 250bp, with 160bp of that coming in the next three meetings. Bloomberg data shows market expectations are for the Fed to hike by 50bp in each of the following four meetings. However, the June meeting is a 50/50 toss-up between 50bp and 75bp; however, several Fed presidents have pushed back against that idea, and most economists think Powell will not endorse a 75bp hike. So, I suspect some believe that sets up a buy the rumour sell the fact trade for the USD on any pushback from Powell. 

I do not think so as positioning data shows declining engagement in long USD on the part of the speculative community. And this suggests a lower than usual likelihood of a sharp retracement driven by an unwinding of positions entered at extended spot levels and tends to support a bullish USD view. In other words, folks with long USD are at fairly good levels. 

In the meantime, the US dollar enjoys broad-based strength amid waning confidence in the euro area and signs of China’s Covid lockdowns weighing on the local economy.