US Close: Merck injects life to reopening trade, Oil bulls in control, Gold hovers, Bitcoin regulatory fears ease

A nice start for stocks in October  contained a breakthrough in the fight against COVID and a resilient consumer despite the delta variant.  Wall Street is putting inflationary fears on the side for now as the light at the COVID tunnel brightens.  Merck’s COVID pill news is a gamechanger in the fight against COVID and while it won’t be immediately available it should just confirm confidence that 2022 will be strong.

Today’s round of US data didn’t really change the short-term outlook.  The August consumer data clearly shows that consumers were impacted by the delta variant as labor market hiring decelerated and margins concern grew.  Consumer spending is moderating as stimulus payments end, but there is still good reason to be optimistic for the rest of the year.

The ISM manufacturing data highlights the supply chain problem remains.  Business demand for new orders remains healthy and that suggests once bottlenecks ease manufacturing activity will pick up in the coming months.  Both the ISM prices paid and University of Michigan inflation expectations show that the pricing pressures will remain in focus.

The next couple of months will be a bumpy ride as the drama in Washington DC will produce some tense moments, China’s broadening crackdowns continue and handling of Evergrande will drag on, and as margin pressures grow.  All of the current risks however should not derail a long-term bullish view for US stocks.  The FAANG stocks might struggle a little over the continued steepening of the curve, more taxes, and regulatory hurdles, but also on a return to the cyclical trade.  Investors are going to gravitate to small cap stocks going into the New Year.  Expectations are still for infrastructure spending to get done and that should help materials and industrials, while rising bond yields is great news for financials.  Energy stocks will continue to thrive over this energy crunch in Asia and Europe.

Oil Brief

Crude prices benefited from Merck’s COVID pill news that will surely help the world see a sooner return to normal.  Oil market fundamentals are mostly bullish, but upside might be capped until the OPEC+ meeting on supply.  If OPEC+ sticks to the script and only delivers the planned 400,000 bpd increase in November, energy markets will shortly be seeing $90 oil prices.  Anything less than a 600,000 bpd increase should lead to higher prices.

Gold

Gold is in the fight of its life as central banks start removing accommodation, with many at a fast pace due to tremendous inflationary pressures.  The surge in Treasury yields is ripe for a pause, so that should provide some support for bullion.  The lists of risks to the global economic recovery are growing, but right now optimism is high that 2022 will be stronger for larger economies.  Gold has successfully avoided a retest of $1700, but that could be tested next week.

Bitcoin

Cryptocurrencies are surging as risk appetite returns, regulatory fears ease, and over optimism the US is getting closer to a Bitcoin ETF.  Fed Chair Powell stole the spotlight with his comment that the central bank does not plan on banning cryptocurrencies, but just as important was the news that BIS said central bank digital currencies may not replace cryptos.

Bitcoin held the $40,000 level as news of the China crypto ban has run its course.  Bitcoin’s best rally since July has some traders scratching their heads, but nervousness over the regulatory path was overdone.  US stocks may have a choppy period in October, but optimism is still high that Bitcoin’s list of risks are less than what might temporarily drag down stocks.

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