Edward Meir: Unexpected market reversal Thursday follows news of Fed rate hike

After a mostly negative reaction to Federal Reserve Chair Kevin Warsh’s press conference Wednesday following the Fed policy statement, Thursday brought us a surprise upside reversal in most markets.

Crude was the notable exception — down for a second straight day and likely a key trigger for Thursday’s about-face. In fact, Brent prices sank by more than $4.10/barrel at one point early Thursday before values pared back a portion of the losses by the day’s close. The decline was not attributable to any particular story but came about after speculators exited long positions on the lack of fresh headlines coming out of the Middle East.

Crude’s price decline pressured US interest rates lower and knocked the dollar back as well. The general dollar index ended Thursday just about flat, never adding much to Wednesday’s impressive advance. Treasury yields also rolled back much of Wednesday’s gains, with the 10-year note now back down to 4.95%.

A weaker dollar and lower rates gave the precious and base metals group a boost and also revived US equity markets. In fact, two of the three major equity indices have already recovered the bulk of Wednesday’s losses in Thursday’s session, with only the Dow falling short.

A few thoughts on the Fed meeting itself

After the Fed increased the federal funds rate by the expected quarter of a point, markets were keen to hear his assessment of inflation and rate policy going forward, but Warsh’s ensuing comments were not that illuminating. This was partly because of just how brief they were. In fact, the whole press conference lasted about 28 minutes, with Warsh’s answers taking up no more than 15 seconds to a minute of time.

Warsh did point out, however, there was no measurable progress on inflation since the last time the Fed kept rates unchanged, so Wednesday’s rate increase should be seen as removing “a dose of accommodation” as part of a larger effort to get to the Fed’s cherished 2% inflation target.

Walsh assigned blame for higher inflation to three variables: robust growth in the economy, competition for funds arising from booming AI investment, and geopolitical risks that are driving commodity prices higher.

We think all three are legitimate explanations. But where Warsh’s messaging fell flat was when he again reiterated the Fed’s commitment to get to 2% inflation but looked uncomfortable when reminded that his own Fed governors are not seeing that materialize until 2029. As a result, investors concluded rate hikes were still in their initial stages despite Warsh’s insistence this was not necessarily the case. In addition, investors may also be wondering how the Fed could ever return to 2% inflation if some of the variables it cited are well beyond its control.

By the end of Wednesday’s close, the Dow lost about 630 points after being down by almost 1,000 at one point, while the S&P 500 and NASDAQ posted more modest declines. Most importantly, interest rates rose. The 2-year note yield spiked from 4.60% prior to the policy statement coming out to 4.73% by the time Warsh finished speaking. The 10-year yield went from 4.95% to 5.02%.

In other markets, the general dollar index pushed sharply higher by the close of Wednesday, finishing nearly ¾ of a point higher and pressuring both precious metals and base metals in the process.

Thursday reversal

We thought the higher rate/higher dollar outlook would prevail going into Thursday’s session as well, but that was not the case as the sharp decline in crude oil triggered a domino effect that shot through several markets.

Both gold and silver bounced back, while we saw a strong showing in the LME complex, too.

Zinc was the best performer Thursday, up by about 2%, also helped by reports of an industrial accident at Korea Zinc’s Onsan smelter. (We are still waiting for additional details here).

Three-month LME copper was up by about 2% as well, while CME copper prices tacked on $0.15 to settle at around $6.66. On the physical side, strong physical demand seems to be returning to the Chinese copper market, best reflected in the rise of the Yangshan copper premium — now at a four-year high of $118.

Outside of zinc and copper, aluminum, lead, and nickel all ended with roughly 1% gains.

Watching the horizon

Despite Thursday’s impressive reversal, we would watch the action in the various markets for a little longer and so would not advocate jumping back in on the long side at this stage. In particular, we are concerned the current dip we are seeing in US treasury rates could reverse course, perhaps the next time crude oil prices jump.

Moreover, it is clear that more rate hikes are coming. Fed policymakers are projecting at least one more increase prior to year-end and a Reuters survey has most banks concurring with that view. Bank of America is the most hawkish among the respondents, calling for two rate hikes by year-end.

Going into Q4, the commodity environment will be facing serious rate and dollar headwinds that could keep oversized rallies in check.

Edward Meir

Edward brings more than a decade of hands-on experience in physical trading across aluminum, tin and scrap, paired with a deep fundamental market analysis background. His unique perspective strengthens AMU’s mission to deliver sharper insight, clearer context, and actionable intelligence for professionals across the aluminum value chain.