Markets

It was a harrowing month for US equities that closed on a decidedly dour note Friday when stocks heeled over close to 4% lower in one of the most painful single-session routs since March 2020.

April was already poised to be Wall Street's worst month since the pandemic struck fear into the heart of investors, so Friday's carnage was an "insult to injury."

The slippery slope to the broader tape can get steep when mega-cap tumbles because the "broad" market is not that broad. US equities live and die by a handful of names, and those favorite Wall Street placeholders were bearing the sell-off brunt.

It was certainly not hard to get the macro 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 stock pickers, there are lots of QE to unwind.

So, the question is, how much of the impact of the balance sheet runoff has stocks pulled forward?

Oil 

Oil was opening up a bit higher after Germany said it was in favor of laying the groundwork for a phased-in Russian oil ban. I do not think this is entirely updated news for the market, but it is crunch time for EU ministers to commit to action now or forgo the opportunity.

Indeed, they have been kicking the can on this for a while, suggesting they want to embargo Russian Oil but lack a lasting backfill offset. 

Oil remains supported as the EU appeared to progress on a Russian crude import ban. But further gains will be limited to weaker oil demand prospects from China due to the continued expansion of lockdowns and mass testing across the region.

Friday's late sell-off in NY was chalked up to a technical expiry collapse in the heating oil and diesel contract. 

The EU is caught in a tricky situation while trying to figure out the solution to weaning off Russian energy dependency, avoiding an economic collapse, and compensating Russia through higher energy prices on its remaining energy exports. 

So, in the absence of an immediate EU total oil embargo, eliminating mobility restrictions in China is necessary to drive oil out of its current range.

Forex

Stocks lower, US dollar up while China's zero COVID policy is fueling the USD.

FX risk sentiment remains shaky due to lockdowns and restrictions in China. The markets are digesting the implications for growth and the global supply chain amid concern central bankers are caught in an inconvenient situation with inflation sticky but activity data under pressure. 

Risk sentiment has proved fragile and drives strong USD demand as the Fed looks to embark on an extremely aggressive rate hike trajectory, with a 75 bp hike in July creeping into the picture.

Recent gains reflect two favorable traits of the US dollar's personality, where rising concern about growth risks in Europe and China are fusing with increasingly hawkish Fed pricing.

And the drawdown in global equities—typically supports the safe-haven dollar.

For all its hawkish talk and the market's adjustment to a much higher path for Fed funds, the Fed is not getting in front of inflation expectations; the hiking path gets steeper, but weaker stock markets are the FOMC's mission creep.

 It is not easy to see what might turn these dynamics around over the short term.

Asia Forex

Although we are entering the "golden week" and typically a low liquidity period for CNH, China remains in focus for obvious reasons. 

Many non-FX entities were hedging equity and credit exposure via USD/CNH, but the spot retraced after the Politburo got underway and comments struck the right tone with markets.

The strong rally in China stocks on Friday caused a plethora of hedgers to run for the exits. Still, with no change in domestic COVID policy, the bias remains for the trend higher to continue.