US Close: Stocks Claw back, Fed Preview, Oil drops, Gold steady, Bitcoin fights for its life

Stocks tried to claw their way back from a massive Monday liquidation that stemmed from rising fears of aggressive Fed tightening and on fears of Russian invasion of Ukraine.  Investors may have gotten a bit too pessimistic about the growth outlook and the market selloff looked more like a reaction that the Wall Street was thinking the Fed could signal a 50-basis point rate hike for the March meeting and a late spring kickoff to the balance sheet runoff. 

Fed Preview

Market expectations going into the Fed’s January FOMC policy decision have violently swung from a gradual tightening to an aggressive hawk.  Powell’s latest testimony signaled that the balance sheet runoff decision could take two, three or four meetings. 

The Fed is scrambling to control inflation and markets have gone from expecting a gradual interest rate hiking cycle to an accelerated tightening action until inflation eases.  The current Fed pivot has proved disruptive to growth forecasts and that may unsettle many at the Fed.  The Fed may choose to ease up on the aggressiveness in starting balance sheet reduction before the June meeting. Some economists think the Fed needs a half-point rate increase in March to show they are serious about tackling inflation and signal that more are coming.  The Fed needs to send a message they are tackling inflation, but they don’t need to overcommit themselves. The Fed’s best option is to signal they will raise rates by 25 basis points in March and signal another one is coming in May.  Inflation may show its peak around then and they may not need to be as aggressive going forward.  

Oil

Crude prices turned negative as US equities tumbled as investors went into de-risking mode on both fears that the Fed may send this economy into a recession and over brewing geopolitical risks across Ukraine and Taiwan. All the market fundamentals still point to higher oil prices, but today’s selloff was a panic selling moment that just has energy traders sell everything.  Uncertainty over coordinated efforts by Russia with Ukraine and China with Taiwan could lead to added risk aversion selling days in the coming weeks.  President Putin is expected to meet President Xi at the Beijing Olympics opening ceremony on February 4^th.   

Halliburton

It is no surprise Halliburton delivered strong results given the move higher with energy prices and given how they have become a very efficient company embracing AI.  A lot of the good news was priced in as most analysts expected them to be optimistic about pricing power and their cash flow.  With oil prices likely to remain elevated a chorus of analysts expected dividends and buybacks to rise.

Halliburton is still levered to the North American market and that should be good news for future growth. Fracking companies are not going to get a pass from the Biden administration, but they won’t be receiving any new measures that disrupt them from increasing production. 

Gold

Gold prices performed nicely compared to the pain that hit most commodities.  Gold got good news on Friday after the largest bullion-backed exchange-traded fund, SPDR Gold shares posted its biggest net inflow in dollar terms since listing in 2004. A laundry list of geopolitical risks will likely lead to safe-haven flows for gold that should help it soon break above the $1850 level. 

Bitcoin

Bitcoin believers are trying to hold the line.  This is a key moment for Bitcoin and if panic selling returns on Wall Street, the $30,000 level might not prove very supportive.  A period of calm should enter as financial markets await the Fed, but that might not be the case given January’s volatility.

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