The S&P 500 reversed against the new ATHs, as the spikes in yield sent a tech bundle. The value did not soar, but it held up considerably better. Still, bulls are getting on the defensive. Markets interpreted Powell’s appointment as a hawkish choice. I wrote the previous Monday:
(…) The Fed continues to print a huge amount of money on a monthly basis, and one wonders how far they would actually go in executing the plans – I see the risks to the real economy coupled with a inflation still high, rising since 2Q 2022 (if not since March already, but more pronounced in 2H 2022.
Inflation is not in the Fed’s sights, and yesterday’s reaction to yields and precious metals is a bit too harsh. While rates are on an upward trajectory as I wrote yesterday, precious metals have overreacted. Certainly, the bullish argument for the dollar has come to the fore as the yield differential between the United States and the rest of the world has turned more positive, and at the same time, various yield spreads continue to shrink. This reflects less favorable incoming economic data. Just as Friday’s reaction concerned projections of the economic impact of the coronavirus, yesterday’s reaction concerned monetary policy anticipation.
Inflation expectations barely budged – the decline does not count as a trend reversal. The CPI has not finished rising, and more forward-looking incoming data (eg producer prices) would confirm that there is more to come. Overall, it looks like precious metals (and to a lesser extent commodities) are giving Powell the benefit of the doubt, which I think will lead to some disappointment over the next few months. If Powell heeded the will of the markets, the real economy would weaken considerably, forcing him to make a sharp conciliatory turn – and he would, faster than he has since been contested in December 2018.
We are seeing an overreaction from real assets – as reported yesterday:
(…) The Fed should turn the tide once the effects of tapering start to be felt more – not now, with more than $ 100 billion added monthly. Cyclicals and commodities, which appreciated massively compared to a year ago (oil has doubled), are feeling the pinch of new economic activity dampening speculation despite the polar shift in US strength in the economy. energy of 2019 and before. Begging OPEC + to increase production might not do the trick, and with so much inflation already (and to come), the key investment theme is the strength of real assets.
Precious metals have erupted, are no longer an outsider, and inflation data will not slow down for a few more months. And even as they would, it would have a palpable cost to the real economy, and further resolute stimulus would not be far off. As I wrote in April 2020, this is the continuous stimulus that is the go-to response whenever the horizon darkens, for whatever reason. Wash, rinse, repeat.
Let’s go directly to the graphics.
S&P 500 and Nasdaq Outlook
The S&P 500 bulls have momentarily lost the upper hand and the recovery in value is not yet strong enough to push it forward. A less heavy movement in bonds – temporary stabilization of yields – would be necessary to calm the nerves of the stock markets.
Treasuries held up the best, and this is characteristic of a feeling of risk aversion. The low volume of HYG does not promise a rapid return of a lot of strength.
Gold, silver and miners
Precious metals have fallen sharply and have not yet stabilized. The pressure on the bond markets is being felt strongly even if inflation expectations have not followed with the same veracity. The next few days will be really revealing.
The Crude Oil Bulls made a good movie, and more strength needs to follow. The fact that this happens when the dollar strengthens and many countries draw on their strategic reserves bodes well for the recovery of black gold.
Construction of a copper stepping stone continues and the CRB Index is not revealing a significant return – the Fed’s hawkish bets should be taken with a pinch (at least in the near term).
Bitcoin and Ethereum
Bitcoin and Ethereum still go awry, and today’s resilience bodes well – across the board for risky assets.
S&P 500 bulls need the technology to come to life, and there’s a good chance that will be the case with a break from peak performance. While the bond markets are right, yesterday’s fear over corporate bonds was a bit too strong – the Fed is not yet in a position to stifle the real economy by slamming on breaks. The markets are speculating prematurely on this result, which would be a matter of the second or third quarter of next year. T-bills have clearly passed the top, however, and stocks are reaching the top a few months apart – we’re not there yet. Take advantage of the rise in commodities and the confidence that is gradually returning to precious metals.