OANDA – Stocks Slump As Inflation Fears Drive Fed Rate Hike Expectations, Dollar Follows Treasury Yields, Oil Softer As Supply Returns, Gold Steady
Q4 2021 hedge fund letters, conferences and more
Gates Capital Management's ECF Value Funds have a fantastic track record. The funds (full-name Excess Cash Flow Value Funds), which invest in an event-driven equity and credit strategy Read More
US stocks are sliding as surging pricing pressures have the Fed on a fast-track to get rates back to neutral. Every trader over the weekend read the Goldman note that eyed four Fed rates hikes and balance sheet runoff in July, if not sooner. Surging yields are kryptonite for many tech stocks and that theme won't change until after we get past the first couple rate hikes.
Today is all about risk aversion as fears grow that financial markets completely misread the Fed's scramble to battle inflation. Even cyclicals are struggling as the White House and Senator Manchin seem nowhere closer to getting Build Back Better done. Over the weekend, the Washington Post reported that Manchin’s $1.8 trillion social-spending blueprint appears to have been pulled. The Biden administration knows this will be the last major piece of legislation that will get done before the midterm elections and something needs to get done over the next month.
Despite all the concern with inflation and there still be a lot of froth in the market, US stocks, in particularly cyclicals should do well over the short-term. The Nasdaq is already down over 6% in January, but that might not last as mega-cap favorites such as Microsoft Corporation (NASDAQ:MSFT), Alphabet Inc (NASDAQ:GOOG), and Amazon.com, Inc. (NASDAQ:AMZN) could have very strong earnings.
Focus on Inflation
The latest round of pricing pressures is being felt a bit more by a lot more Americans. Labor shortages with truckers, warehouse workers, and a wide range of manufacturing jobs suggest the peak in price hikes is going to get very ugly. The supply chain situation is leading to many empty grocery shelves across several supermarkets. The key data point this week will be Wednesday's US inflation report. US inflation is expected to post an annual increase over 7.0%, which would be the strongest reading in almost four decades. Wall Street has become very confident that the Fed can go ahead and raise rates in March and this inflation report will likely confirm the growing belief that four rate hikes can happen in 2022.
Despite growing optimism abroad for European assets, surging Treasury yields and risk aversion on Wall Street has the dollar making a strong run. Now that the US economy is basically at full employment and with inflation still running hot, the scramble for rate hikes seems like the dollar could still be king a little while longer.
Crude prices are lower after Libya’s largest oil field resumed production, Kazakhstan’s TCO oilfields are back to normal levels, and as China's zero-COVID tolerance will lead to new restrictions. The oil market will likely remain very tight as the world learns to live with COVID. Travel bans will continue to be lifted as the focus will go to testing and that should do wonders for international travel once test makers have a better handle of the situation.
Considering how much oil prices rallied last week, the current weakness is somewhat limited given how tight this market is still expected to be throughout the first quarter. WTI crude may continue to drift here until a better understanding is had with how successful China is in preventing further spread of omicron.
Gold prices steady despite a continued Treasury yield surge as Wall Street prices in more Fed rate hikes this year. With global bond yields hovering near pre-pandemic highs, gold prices are not performing too terribly. The Fed can control the short-end of the curve, but the back-end is a different story. The balance sheet runoff is the big question mark and that will likely drive the flattener and have many investors needing an alternative safe-haven such as gold at some point this year.
Now that the Fed is rushing to get rates to neutral and to start shrinking the balance sheet, which means the yield curve could flatten more and that is good news for gold.
Bitcoin and Ethereum got knocked down early as Treasury yields surged as expectations remain strong that inflation will not ease anytime soon, prompting the Fed to deliver more than a few rate hikes this year. Everyone was expecting one more major slide before crypto traders would be willing to test the waters. Bitcoin’s plunge below $40,000 was short-lived as was Ether’s drop below $3,000. The top two cryptocurrencies have an uphill battle to return back to their respective all-time highs as the cryptoverse is now providing more investment opportunities that include NFTs, metaverse bets, and several altcoins that are making a run to become the next big blockchain.
Short-term volatility will remain elevated for Bitcoin and Ethereum, but for long-term hodlers, the outlook still looks bright.
Article By Edward Moya, OANDA