The Perilous Path to Market Stability

MARKETS 

Chair Powell signalled that the Committee would likely be deciding between 50bps and 75bps at the July meeting and that an ultimate step down in tightening will depend on evidence that inflation is moderating.

Hence, it is a bumpy road to bond market the equity market stability with the Fed in full-on hawk mode with investors believing there is only a narrow path to a soft landing.

The MOVE index was around 100 at the beginning of the month and is around 140 now. It is higher than the last round of Fed repricing in April and late February when Russia invaded Ukraine.

Just as mega-cap stocks are not meant to behave like penny stocks, neither are Treasuries.

Financial markets are pricing stagflation in the US, with inflation expectations high regardless of the Fed’s action, and that is the worst possible scenario for equity markets. No sector does well, even energy. Growth is slowing, the cost of capital is rising, and since the debt has become expensive, investors think there is no sense in buying indexes at this level other than on short-term reversion plays.

Focus shifts from supply concerns to demand trends as monetary tightening continues. Surprise hike by SNB. Some signs of capitulation across asset classes as fear of recession and defaults grow, and Crypto comes under pressure, but VIX surprisingly remains relatively calm.

The market’s biggest problem is a lack of confidence and liquidity. Searching for that positive catalyst, but positioning may be enough.

China reopening process continues. While corporate news remains more bullish than bearish at this point, there are still a few flickering lights at the end of the tunnel, and it would be great if oil would cooperate and fall further. Is Ukraine Russia resolution possible? Indeed, that could be a massive soothsayer.

Moral of the story: most of these major central banks are praying for some relief from inflation and hoping the data falls in line, but unless conflict there is a detent in the Ukraine -Russia war conflict, escalation will continue to drive energy price fears so it could be a tough road ahead.

OIL 

There is a ton of head-scratching, especially concerning Friday’s massive downward crude oil move, with people grasping at straws to explain what at first appeared to be an irrational move, as the vast drop was undoubtedly out of the sphere of the demand and recession narrative that has been filling new reels al week long. Still, Oil markets are not immune to the constant recessionary and demand destruction drumbeats.

Headlines indicate Libya is producing 700kb/d, which is far more than 100k/d that the government oil minister claimed last week. Still, traders take Libya data with a grain of salt as it is notoriously unreliable.

And there has been an unusual about of Ukraine peace talk rumblings.

WTI crude oil has sold off nearly $8 since 06:00 New York, with the bulk of the move coming after White House Economic Adviser Heather Boushey said in an interview cited by Bloomberg that President Joe Biden is trying to get refiners “back online” in a hurry and needs to get supplies to consumers. Well, that sure sound like more oil is on the way but from where? The potential curtailment of product exports is what traders had been focused on

The non-stop Biden headlines, with the administration seemingly in inflation hence election panic mode, played a part in the Friday selloff as investors hate any uncertainty. But on a positive note, governments are trying to get more creative to alleviate some skyrocketing price pressures.

We still do not think imposing new Iran sanctions ahead of Biden’s upcoming Saudi visit was a coincidence, more likely an olive branch. The question is, will the Middle East swing supplier up their game?

CRYPTO

Friday headlines read a break of $20,000 meant lights out on the chart, but today it was a counter-trend signal. If I am not mistaken, is not this poly filler-themed nonsense to fit the narrative?

Before a convincing rally can evolve, the street needs to figure out how long the collateralization and the rehypothecation domino effect is from 3ac and other possible liquidations. And how many folks they drag down the Rabbit Hole.

Is this the “Big One” (BTC into oblivion)? Probably not, but it will be challenging for crypto coins to return to their former glory. The irony behind this debacle is that roadshows pitched Crypto as the empowering choice to opt out of the traditional financial system, now falling prey to the system it was built to counter.

Originally published by Stephen Innes, Managing Partner, SPI ASSET MANAGEMENT