Fed React: Don’t trigger a tantrum, GameStop still rising, Apple on deck, Oil can’t hold EIA gains, Gold drops, Bitcoin pares early losses

The Fed took a backseat to the Reddit traders’ annihilation of short sellers.  The GameStop/AMC phenomenon wrote a new chapter today after brokerages were forced to curb some of the relentless call option buying.  Market makers continued their vicious cycle of buying GameStop and heavily shorted friends as a new wave of retail traders succeeded in taking on giant short-sellers Citron and Melvin Capital.  Dealers are in a buying frenzy loop as the meteoric rise in GameStop continues.  A small out-of-money call option is forcing the middleman to buy a significant amount of shares.

US stocks posted the worst decline since October as investors start to question stock market valuations.

Fed

The Fed policy statement delivered no surprises, rates and QE stayed steady as the dovish case was confirmed.  The Fed will discontinue the overnight repo operations in February, a sign the short-term US dollar funding markets have improved significantly. The ongoing public health crisis continues to weigh on the economy, with vaccinations being the key to the recovery.  The recovery has taken a few bumps from virus variants and delays in fiscal support but it seems the Fed still believes the next move is for more accommodation, even as optimism grows for a return to normalcy at some point late this year.  The impact of pandemic will be long-lasting and that should keep the Fed determined on maintaining their dovish stance throughout the remainder of the year.

Powell’s press conference affirmed their stance that the Fed is focused on supporting the economy and that any talks of tapering is premature.  He reiterated that tapering would be gradual and that the Fed expects they will be able to raise rates, freeze the balance sheet and eventually shrink it just like they did after the global financial crisis.

Apple

The most important earnings report this season is expected to follow Microsoft and Netflix and deliver stellar results. Investors are focusing on a $100 + billion record revenue, strong iPhone sales, improving gross margins, and steady demand for Macs and iPads.  Apple is key to keep the love for tech stocks going strong.

FX

Before the Fed, the dollar surged against the euro after an ECB report that suggested policymakers are uneasy that markets don’t believe more rate cuts could happen.  Europe is struggling in the fight against COVID and if the recovery stalls further, rate cut bets will grow.

The Fed’s dovish commitment did little to trigger a reversal for the dollar, but given today’s broader market selloff it should not be no surprise the dollar held onto its gains.  Given the considerable risks to the outlook and drawn out stimulus negotiations, the dollar’s gains should be short-lived.

Oil

Crude prices pared earlier gains that stemmed from a huge drop in crude inventories and as China’s appears to have contained the latest surge in new COVID cases.  The EIA crude oil inventory report was very bullish given the largest drop in crude inventories since July, exports surged the most since August to over a 1-million barrels a day and as US crude production fell 100K barrels to 10.9 million bpd.

Oil has been rangebound for the past few weeks and it seems like nothing will change unless something major happens on the COVID front.  Crude prices could surge higher if Europe gets their vaccine rollouts heading in the right direction or tank if virus variants shutdown China and other countries that have been successfully reopening.

Gold

Gold’s volatile session saw prices settle lower as investors focused on the Fed’s optimistic tones on vaccinations, which suggest a strong recovery in the second half, and some premature taper guidelines.  Gold can’t get its groove back until the dollar rebound is over.  The Fed will be late to the taper talk party as they remain concerned over the long-term scarring effects on small business and unemployed workers.

Gold’s consolidation phase continues and the bull case should remain if prices can hold the $1800 level over the next couple of weeks.

Bitcoin

The new retail trader is tentatively unwinding some cryptocurrency exposure to jump on the incredible dislocation that is happening with the stock market.  Bitcoin has steadily relied upon rising institutional and retail interest, but that has taken a backseat to the war amongst giant short-sellers and Reddit following retail traders.

Bitcoin tentatively broke below the $30,000 level in early trade as the dollar rebound accelerated, but buyers emerged and have brought it back above $31,300.  The Bitcoin party will continue as long as they continue to attract new big money funds.  Earlier in the week, Coindesk reported Harvard, Yale, Brown and the University of Michigan have been buying crypto directly on exchanges.

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