US Close – Stocks turn positive after bond market selloff overdone, Oil finds major support at $100 level, Gold pummeled, Bitcoin hovers

Wall Street still seems hesitant to ‘buy the dip’ after another round of soft economic data and on fears the market might not be pricing in enough Fed hawkishness. The bond market delivered another major move with the 10-year Treasury peaking just above the 3.00% level.  The S&P 500 wasn’t ready to break the critical 4,000 level just yet, which could suggest stocks are ready for the typical consolidation that happens before a key Fed decision.

Fed

On Wednesday, the Fed will debate a 75-basis point rate hike, but most likely settle on delivering a half-point interest rate hike. Just as important is the Fed decision on the balance sheet runoff start, which could see the Fed put a $40 billion monthly cap on Treasuries and $25 billion target on mortgage-back securities. They might have a larger cap on balance sheet normalization and that could provide a hawkish surprise that could deliver the next round of dollar strength.

The market has priced in a strong start to the rate hiking cycle, but the big question is how aggressive they will be with quantitative tightening. What will determine if the FOMC decision is hawkish is if Q/T is closer to $70 billion a month, with a cap around $50 billion being somewhat dovish.

Oil

Crude prices declined after reports that Hungary veto the EU’s proposed ban on Russian energy.  The growing risk of an embargo on Russian seems less likely until the EU can secure additional energy supplies for Hungary. Hungary can’t function without Russian energy and the EU will need to win their support in delivering harder-hitting sanctions against the Kremlin.

Dragging on crude is China’s recent string of softer economic data and new wave of COVID restrictions and outbreaks.  Covid cases across Shanghai appear to be heading in the right direction, but energy markets are hesitant to become optimistic given the uncertainty of how bad the negative impact will be for the crude demand outlook.

Oil prices seem to have strong support at the $100 a barrel level, but a massive rally seems unlikely given the return of US production and weakening gasoline demand.

Gold

Gold prices continue to get pummeled as traders price in much more aggressive Fed tightening.  The gold market can’t stabilize until the bond market selloff shows signs of easing.  Gold could remain in the danger zone if the stock market has formed a bottom.  Gold isn’t acting like a safe-haven right now, but if stocks stabilize here the selling pressure for the precious metal could resume.

For gold to become attractive again, Wall Street needs to become confident that the majority of Fed tightening has been priced in and not overly bullish with stocks.  Dip buying for equities is emerging but investors are still doubtful that we will see an all-clear signal anytime soon.  If gold continues to slide, the $1835 level should provide tentative support.

Bitcoin

Bitcoin is hovering around major support as investors start to price in much more aggressive Fed tightening.  Bitcoin could still further downside if volatile market trading continues in May.  The $35,000 level should provide major support for Bitcoin, but if the Fed delivers a major de-risking moment downside could target the $30,000 region.

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