US stocks dropped Monday as China’s covid policy concerns and hawkish Fedspeak weighed broadly on sentiment as the looming recession narrative grows more vocal in the background.

St. Louis Fed President James Bullard said in an online event that the Fed will need to hike rates into next year and that there is still “a ways to go” before a policy is “restrictive.” He reiterated that the Fed needs to hike rates to the 5-7% range to make policy restrictive enough to cool inflation. And with China supply chain issues back on the radar as the rise in COVID is forcing local plant closures, Vice Chair Lael Brainard said, the string of supply shock keeps inflation risk elevated.

What the Fed does next will likely determine whether the dollar surges again and the S&P 500 slumps. Or if the dollar has peaked, the equity market can embark on a rally next year.

With China mired in a tug-of-war between weakening macroeconomic fundamentals and increasing reopening hopes, the latter is getting dealt a cruel hand as any hope for accelerating reopening plans when new COVID cases are rising is unlikely given the low vaccination coverage of the elderly.


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Energy prices are rising again, and China’s path to reopening will be bumpy and dotted with numerous COVID craters. And the Federal Reserve may not be in the mood for turning just yet, suggesting today anyway, it is time to hit the brakes on the anticipated Santa Rally as recessionary forces around the world, particularly in the three largest economies, will continue dominating the macro environment into year-end..


With the news flows oscillating between OPEC supply increases and OPEC supply cuts, it adds another level of volatility that traders need to defend as trial balloons float and deflate. Although, in reality, it will only be Saudi Arabia trimming at the margin. Still, OPEC seems almost to aim to wrong-foot the market with the timing of policy shifts, so we can not fully rule out a production cut.

While the protest in China is indeed eye-catching and weighed like an anvil on broader sentiment, oil markets turned more pragmatic, heeding caution not to interpret the flashpoint overly bearish.

In addition to the macro headwinds engulfing the global landscape, European Union governments disagreed on a price cap on Russian seaborne crude oil, adding yet another layer of volatility but this of the unwelcome variety.

Next Sunday, Russia is also due to meet members of the Opec+ group to discuss production policy, setting up a crucial week for the oil market as headline risk is bound to keep traders hopping.


With traders seeking shelter under the US dollar “safe haven”  umbrella as recessionary storm clouds build, the dollar demand then kicked into gear after a chorus of Fed speakers turned up the “Hawk-O-Meter” on Monday, likely setting the table y ahead of Fed Chair Powell’s speech on Wednesday. There is a good chance he will dial it up to the red zone. Hence it may be too premature to toss out 2022-dollar playbooks just yet.

Published by Stephen Innes, Managing Partner, SPI ASSET MANAGEMENT