Indices flat, fear index falls, reflecting calm ahead of expected rate rises

Today was a “risk off” session overnight for commodity and equity markets as Treasury yields rose ahead of May’s Federal Reserve policy meeting. Traders are now looking to forward the looming June debt ceiling clash in Washington, with the two sides still very far apart. Earnings reports were generally mixed. Surprisingly, the VIX fear in index continues to trade at an eighteen month low, reflecting calm on Wall Street. Oil saw profit-taking.

One more rate hike?

Wall Street is resigning itself to the fact that the next 25-basis-point rate hike from the Federal Reserve when it meets in two weeks might not be the last rate hike. The Fed’s Beige Book is due this afternoon, providing an updated assessment of the economy that Fed members will be using to make their decisions when they meet early next month. That book could provide a few surprises for traders, but otherwise the waters are relatively calm at this moment.

Oil reserves fall

US commercial crude oil inventories (excluding the Strategic Petroleum Reserve) fell by 4.6 million to 466 million barrels in the week ending April 14, putting them 2% above the five-year average for mid-April. Gasoline stocks rose by 1.3 million barrels, leaving them 6% below seasonal levels. Oil distillate stocks dropped by 0.4 million barrels, putting them 11% below levels typically seen in mid-April.

Markets stabilized

• At the time of writing, the broad S&P 500 index and tech-heavy NASDAQ were unchanged at 4,150 and 12,149
• The VIX, Wall Street’s fear index, fell back to 16.4 – now an eighteen month low
• The dollar index was flat at 101.7, with major cross rates unchanged at €‎/$1.10 and £‎/$1.24
• Yields on 2- and 10-year Treasuries continued to rise to 4.27% and 3.64%, respectively

Commodities fall, led by oil

• Crude oil prices are more than 2.3% lower, reflecting profit taking despite weaker US oil reserve data
• Gold prices were down 0.7%, to $2,005 per ounce, holding the psychologically import 2K level
• Grain and oilseed prices were mostly lower. Wheat prices led the way lower with ships flowing again in the Black Sea
• Corn and soybean prices firmed again

China and Russia buddy up

• China’s Defence Minister returned from Moscow with a new strategic agreement, expanding military cooperation and support for one another to jointly resist threats, improve services, exchange intelligence, and to conduct exchanges in personnel
• Analysts believe that could include what China considers to be a threat to Taiwan via the West supporting its independence, while it could also include what Russia considers to be a threat to its sovereignty from NATO in Eastern Europe
• Meanwhile, Taiwan announced plans to purchase as many as 400 land-launched Harpoon missiles from the US, according to our sources

China boosts oil demand

• Global crude oil demand is expected to rise by more than 2 million barrels per day this year, with more than half of that due to increased air traffic, largely tied to China’s reopening
• Domestic flights in China are at 90% of pre-Covid levels as the people of China quicky resume domestic travel
• International travel tied to China though is slower to recover. International travel between China and other Asian nations is resuming, but routes between China and Europe and between China and the United States are slow to recover

Ukrainian grain stil moving

• Ships slowly started moving through the Ukraine “safe corridor” again today, after movement halted over the previous two days (the second time in as many weeks that movement was halted)
• Ukraine officials are the ultimate optimists, but they too are now saying that it may not be extended

Analysis by Arlan Suderman, Chief Commodities Economist

Contact: Arlan.Suderman@StoneX.com