US stocks declined as the harsh reality sets in that the Fed most likely won’t be able to navigate a soft landing as geopolitical risks will continue to keep upward pressures on prices and force the Fed into a difficult decision later this year. The Fed will either have to tighten policy so much that it sends the economy into a recession, or it will once again have to flip flop and prevent policy from becoming too restrictive. Wall Street’s resilience for risky assets can’t handle a flip-flopping Fed and that seems to be what some traders are expecting.
Stocks will struggle here as geopolitical risk uncertainty will continue to send energy prices higher and that will leave an unbalanced global growth picture that will make it very difficult for companies.
The war in Ukraine seems like it could last a lot longer after a German government spokesperson Hebestreit said no new big Russian sanction package is expected from the EU Leader Summit. Ukraine Presidential Advisor Arestovich voiced optimism that the Russian army has halted in many directions and that he sees the active phase of war ending before the end of April. If this war does not go deep into the summer, that could provide some vindication for equity bulls and for calls that inflation could start to come down by the end of summer.
Gas prices jumped to a seven-week high on expectations of colder weather for the next couple of weeks. After some nice weather in the Northeast that had some opting to not where any coats a cold front is coming and that should boost demand for natural gas.
Crude prices did not have a strong initial reaction to EIA crude oil inventory report as energy traders remain fixated over the fate of future Russian sanctions on energy and the potential shock that could hit European markets. After traders gave the EIA report a good look, they realized that the headline draw of 2.51 million barrels occurred alongside the tapping of the Strategic Petroleum Reserve of almost 4.2 million barrels. The oil market is very tight and with US production remaining steady and as stockpiles continue to decline, oil prices have only one way to go.
Gold prices are rallying as the bond market selloff appears to be over for now. Surging Treasury yields and rising stocks did not provide investors a good reason to hold gold. The extraordinary NATO meeting might not lead to any harsh measures against the Russians and that could suggest an immediate resolution might take a while longer. Investors will eventually get a wake-up call that surging yields and weaker growth prospects is not a good equation for many stocks and that should bolster the argument for defensive plays. Whether investors choose gold or try to keep riding anything tied to the commodity wave higher or play defensive by going back to high-tech and consumer staples stocks is the big unknown. Gold should continue to stabilize here as long as stocks don’t push much higher.
Bitcoin is performing nicely given today’s risk aversion theme. Bitcoin is stuck above the $40,000 level and that is a good thing for long-term investors. Bitcoin should remain a sideways trade until Wall Street makes up its mind as to whether equities can continue to perform well with all the geopolitical uncertainty at hand.