Markets sing after Federal Reserve raises rates

This is an audio transcript of the FT News Briefing podcast episode: Markets sing after Federal Reserve raises rates

Marc Filippino
Good morning from the Financial Times. Today is Thursday, May 5th. And this is your FT News Briefing.

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The Federal Reserve raised interest rates yesterday and some called that dovish. Europe finally proposed a ban on Russian oil. Plus, we’ll have a military update on the war in Ukraine. And we’ll tell you why a million Ukrainians have returned home.

Ben Hall
For a lot of people, it’s very difficult living abroad, away from home when your home is being attacked.

I’m Marc Filippino, and here’s the news you need to start your day.

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Well, the Fed did it. At the end of its two-day meeting, the central bank raised its key benchmark policy rate by half a percentage point, just as expected. Now, normally, a rate rise would push stocks down. But yesterday, after the Fed’s move, the S&P 500 and the Nasdaq both jumped about 3 per cent. Here’s the FT’s. Kate Duguid.

Kate Duguid
This was largely the market breathing a sigh of relief that the Fed didn’t go further. People ahead of the meeting were speculating that the Fed may increase rates by 75 basis points at some point down the line, and chair Powell nixed that idea.

Marc Filippino
What did you hear from investors and analysts that you spoke to?

Kate Duguid
I actually heard like kind of differing things about whether or not this was hawkish or dovish. It seems like the market reaction is mostly that this has been a dovish move. But I did hear from a couple people who said that they thought the Fed was still trying to sound very hawkish. Chair Powell opened by addressing the American people, which is kind of an unusual move, and said very clearly, you know, inflation is a problem. We are focused on inflation, and we’re going to use all of our tools to bring it down. So some people sort of felt that this was still kind of a hawkish statement at some point. Chair Powell said that he expected a soft or soft-ish landing, which means that we could have no recession in response to rising rates or maybe a little bit of an -ish recession. And so-so it seems like the Fed definitely was suggesting that they are prepared to slow the economy in order to rein in inflation.

Marc Filippino
Kate Duguid is the FT’s US capital markets correspondent.

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It’s been about two weeks since Moscow regrouped its forces after failing to take Kyiv, it refocused its military efforts on south-east Ukraine. To talk more about what’s happening on the military front, I’m joined by the FT’s Europe editor Ben Hall. He’s in Kyiv. Hey, Ben.

Ben Hall
Hey, Marc.

Marc Filippino
So, how much damage or what kind of inroads are Russian forces making in the south-east?

Ben Hall
In a nutshell, they’re not making that much territory, according to one Ukrainian adviser to the president. He told us they had basically made 25km in about four weeks since they first said that they were going to refocus on the on the south and east of the country. So they’ve only inched forward. In some places they’ve made some more gains, but they tend to sort of inch forward, take a village and then get beaten back by the Ukrainians. The war has become quite static in nearly the entire length of the front line, which is a thousand kilometres, and it’s very much artillery based. It’s both sides pounding each other with artillery, guns and missiles. And that’s something where the Russians have quite a big advantage.

Marc Filippino
So, Ben, there’s this kind of important day coming up in Russia. It’s May 9th, and it commemorates Russia’s victory over the Nazis in world war two. So there’s going to be a big celebration. There’s going to be parades in Moscow. And there was this idea that Russian President Vladimir Putin wanted some kind of victory in Ukraine on that day. Is that true? And what does that translate to on the ground?

Ben Hall
It’s certainly what the Ukrainians think and many other people think that that was his original plan was to sweep through eastern Ukraine and to take the full administrative borders of the Donbas region, where pro-Russian rebels have been who seised about a third of the territory in 2014. And Russia wants to take the whole lot and then maybe annex it and incorporate it into Russia, as well as taking a sort of southern coastal strip. Now, the Kremlin will deny that they ever set this is May the 9th objective, but it’s clear that Russia has not got the kind of successes that objectively you could call a success. Of course, Vladimir Putin may try and spin their achievements, especially in the town of Mariupol in the south. They may be able to claim that as a victory. He could, of course, use May the 9th as a moment to try and sort of double down on the war and to galvanise the Russian nation for what he might try to portray as a sort of existential battle and an all-out war against Ukraine.

Marc Filippino
Ben, I want to turn away from the battlefield for a second and talk about the people who left Ukraine at the height of the war who are apparently now coming back. You wrote that about a million Ukrainians have returned after fleeing. Why are they coming back?

Ben Hall
Well, I’m sure there are a million reasons why a million people are coming back. But I think for a lot of people, and let’s remember there were five or five and a half million Ukrainians who felt they had to leave the country, it’s very difficult living abroad, away from home when your home is being attacked. And I think a lot of people looked at the situation in Kyiv after the Russians pulled back, and they know their country is big and now they see their armed forces as being very resilient. And they have increased confidence that Kyiv any way and quite possibly a lot of the west of the country is now safe because the Ukrainian military has proved its capability against Russian forces. And certainly Kyiv is a lot busier than it was three or four weeks ago. And there are people on the streets, people in cafés and restaurants. Many more places are open, but it’s still not a normal city. It’s still quite empty in relative terms. So it’s a slightly strange feel, almost like a sort of permanent Sunday atmosphere.

Marc Filippino
Ben Hall is the FT’s Europe editor. He’s in Kyiv right now reporting. Thanks, Ben.

Ben Hall
Thanks, Marc.

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Marc Filippino
The EU finally proposed a ban on almost all Russian oil imports yesterday. European Commission president Ursula von der Leyen said it would cover seaborne, pipeline, crude and refined oil from Russia. Now, a move like this would normally be a massive jolt to energy markets. But yesterday there was only a 3 per cent rise in oil prices. The FT’s Tom Wilson explains why.

Tom Wilson
This move has been trailed for months, ever since Russia first invaded Ukraine. A lot of international businesses and oil traders have been expecting some form of sweeping sanction on imports into Europe to eventually be realised. Number two, a lot of buyers have been self sanctioning, so they’ve started to boycott Russian production already. And number three, this is this is definitely the most important factor that’s been flagged, is the fact that Chinese oil demand has been soft for the past six weeks, principally due to the spikes in coronavirus and the consequent lockdowns. So those three things combined mean we haven’t seen a massive reaction at this point.

Marc Filippino
So, Tom, there are still some hold ups, right? Like Hungary says it’s going to block the move and there are a few other hurdles that need to be jumped before this gets done. But do markets think those wrinkles will be ironed out and that this is essentially a done deal?

Tom Wilson
Very difficult to fully predict the future. But in general, yes, the markets are assuming that some form of EU import ban will certainly happen and there’s a few wrinkles to iron out. But ultimately this is a strong statement of intent from Von der Leyen and the European Commission that the EU wants to bring an end to its dependence on Russian energy once and for all.

Marc Filippino
So, you mentioned demand from China. And I want to ask, how much could other countries buy from Russia to offset the impact of this EU ban?

Tom Wilson
Now, that is the million dollar question for global oil markets because there is a world in which you might say, look, if exports to Europe from Russia fall by, say, 3mn barrels a day, then why can’t we just redirect all of that oil from Russia to China? But increasingly, I think people are sceptical. China is an increasingly important energy partner for Russia, but China also depends very heavily on the US as a as a consumption market for its goods, and it won’t want to be perceived by the US and other potential western trading partners to be providing Russia with an immediate, you know, outlet for all of that sanctioned energy. And then the other point to bear in mind is that a lot of these energy flows that are currently flow along pipelines and fixed infrastructure. So in order to get that western Russian crude and gas that traditionally was flowing to Europe, to China, you’d basically going to have to build new infrastructure. Some of it might be able to be put on vessels, but not all of it. So if you wanted to redirect all of these flows, that’s a five-year project to potentially build a whole new set of Russian infrastructure and then transport that energy right across the Russian subcontinent to Chinese buyers.

Marc Filippino
Is there a risk, Tom, that this EU ban on Russian oil could backfire for the EU and over time it will raise prices to the point where Russia will actually benefit from the oil it can sell?

Tom Wilson
So, certainly a risk or rather one consequence of the EU ban could long term or is likely to push the oil price up harder. And in the short term that does mean that Russia is going to be generating more revenue from the oil it continues to sell. But I think, importantly, the European Union taking this step is drawn a clear line in the sand and said the Russian oil is going to be off limits for European consumers for the foreseeable future. While Russia can survive that in the short term because the revenue generating from the oil it continues to sell is high, long term, I think this is fatal for the Russian oil and gas industry.

Marc Filippino
Tom Wilson is the FT’s senior energy correspondent. Thanks so much, Tom.

Tom Wilson
No problem.

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You can read more on all of these stories at FT.com. This has been your daily FT News Briefing. Make sure you check back tomorrow for the latest business news.

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