Stocks slump, Treasury yields pop, Fed in focus, DC, Oil profit-taking, Gold vulnerable, Bitcoin steady
Wall Street is halfway there to seeing its first 5% pullback since early May. The narrative behind today’s stock market weakness is part triple witching, surging Treasury yields, COVID cases are rising again across some states, and concerns over how the economy will react to less stimulus and a potentially smaller-than-expected economic package.
The bond market selloff could see further momentum if technical selling continues. The 10-year Treasury yield tentatively rallied above the 100-day simple moving average. Investors are expecting Fed Chair Powell to set up a November taper and possibly some rate hike dots to move forward. While the steepening of the Treasury curve seems fairly supported domestically, risks across Asian markets could see a flight-to-safety keep demand strong for Treasuries.
The main event of the upcoming trading week is the FOMC policy decision. The two-day FOMC policy meeting will likely be a reiteration that they are poised to taper before the end of the year. Economists will fixate over the updated dot plot forecast to see if any members brought forward a rate hike into the end of 2022. Fed Chair Powell may provide hints that tapering won’t be quick, possibly indicating the Fed will not finish until next winter, which means rate hikes won’t happen until 2023. The economy appears to have survived the delta variant hit and the next couple of months of stabilizing economic releases will pave the way for a November taper announcement.
With monetary and fiscal stimulus starting to wane, clarity on the size of the next economic package and will enter a crucial phase. President Biden was unable to convince conservative democrats of a $3.5 trillion budget and talks will likely lead to a final price tag between $1.5 -2.0 trillion. Some traders will pay close attention to the upcoming tax increases and whether they are retroactive from earlier in the year or if they will be effective this September.
Energy traders did not wait long to lock in profits. After a fourth weekly gain, crude prices slumped after oil rig counts delivered their biggest increase in a month and as risk aversion sent the dollar higher. The weekly Baker Hughes rig count rose from 503 to 512, a 1.8% increase. Earlier, oil prices were under pressure on expectations that Russia’s fourth quarter crude exports will increase 3% from the prior quarter. Russia won’t hesitate increasing production and this could lead to a return of tension at the OPEC+ output meetings.
WTI crude may consolidate over the next few trading sessions until the trajectory of the dollar is a little clearer.
Gold is still in trouble. Gold prices are declining despite a large liquidity add by the PBOC, highest annual pace of inflation in the eurozone since 2011, and broad risk aversion. Gold’s worst enemy is surging Treasury yields and right now that trade is gaining momentum. Fed Chair Powell may have to come to the rescue for gold. A November taper announcement is priced in but for gold to stabilize, the dot plot forecasts can’t shift rate hike expectations to the end of 2022. Fed Chair Powell may stick to the dovish script and commit to a wait-and-see approach.
Gold is still vulnerable to technical selling and will not likely attract buyers until $1700.
Bitcoin prices bottomed out after the Wall Street Journal reported that the “Biden administration is preparing an array of actions, including sanctions, to make it harder for hackers to use digital currency to profit from ransomware attacks.” These potential actions by the US government would be going after the bad players and not necessarily targeting cryptocurrencies or the technology behind them.
Something needs to be said about how well Bitcoin is performing today despite a broad risk aversion theme on Wall Street. Bitcoin’s fundamentals have it well supported right now, but it is still lacking a fresh catalyst to break above the $51,000 level.
Institutional investors are growing frustrated with gold and might be leaning towards increasing their crypto exposure. Next week will be huge for the dollar and potentially and for risk appetite if the Fed sends Treasury yields higher with hawkish rhetoric. Bitcoin may consolidate between $46,000 and $51,000 next week.
This commentary was provided by Edward Moya Senior Market Analyst, The Americas, OANDA