US stocks only had one way to go after inflation fears intensified and raised the risk of stronger tightening by the Fed and a much sooner recession. Wall Street is facing a plethora of negative headlines, but the problem is that until we see a deterioration with credit conditions and market functioning, the Fed has the greenlight to tighten as much as possible to get inflation under control.
An ugly inflation report is being followed by a ‘ferocious’ COVID outbreak in Beijing that will weigh on supply side pressures. Last week, the talk on the street was about growing optimism that China will continue to move forward with a gradual reopening. China was just starting to recover from a two-month lockdown in Shanghai and now it seems they may see their zero covid strategy lead to a fresh wave lockdowns.
Inflation will remain sticky and lead to sharply weaker purchasing power and consumption over the coming quarters, but an immediate deterioration is unlikely and that supports the idea the Fed will be able to move forward with more aggressive rate hikes over the next few meetings.
The S&P 500 is back in bear-market territory as recession fears mount. If Wall Street begins to price in much more aggressive Fed tightening, technical selling could drag the S&P 500 towards the 3,500 level. Many investors are reassessing betting on the US economy and our favoring investments with global franchises with pricing power.
King dollar is not giving up its crown anytime soon. Inflation pressures are not cooling and that is making everyone think the Fed will have to aggressively tighten policy and send the economy into a recession. The dollar will benefit with a widening interest rate differential and on safe-haven flows. BOJ and Fed policy decisions are both expected to lead to currency volatility, but the bullish dollar trend should remain intact. The BOJ is concerned over the rapid depreciation with the yen, but whatever actions are taken to thwart the move in dollar will likely fade.
Crude prices turned positive despite a bloodbath on Wall Street after energy traders were reminded that the oil market will remain very tight as spending on exploration and development was depressed in 2021. The EIA reported that 119 companies only spent $244 billion on E&D in 2021, which is 28% less than before COVID average levels.
The oil market is still very tight as the crude demand outlook remains strong, while supplies are razor thin. Eventually crude demand destruction will occur, but that is not the story today nor will it be until later in the summer. Even the risk of a little extra supply from Saudi Arabia won’t send oil prices sharply lower. If President Biden does visit the Saudis next month, traders will expect to see some extra production from the kingdom.
Many traders are loving the oil trade as broad stock market selling has investors looking for other opportunities.
Gold prices are under pressure as Wall Streets reassess how aggressive the Fed will have to be to get inflation under control. Treasury yields are surging and that theme will continue as supply side problems will continue to keep pricing pressures elevated. Gold will eventually see safe-haven flows but that won’t happen until the dollar hits a peak.
Recession risks are growing and that should ultimately be positive for gold prices. Wall Street just needs to price in a couple more massive Fed rate hikes for the move in the dollar to be exhausted.
It has been a rough few days for crypto traders. Confidence in crypto markets took a big hit as a bloodbath occurred on Wall Street and crypto lender, Celsius paused all account withdrawals/transfers and after Binance had to pause bitcoin withdrawals for several hours.
Sentiment for cryptos is terrible as the global crypto market cap has fallen below $1 trillion dollars. Bitcoin is attempting to form a base, but if price action falls below the $20,000 level, it could get even uglier.
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