US Close – Unsettling volatility, stocks crushed, GBP plunges, oil tanks, gold gutted, bitcoin lower

Unsettling market volatility is going to be here for a while as Wall Street broadly downgrades their end of year S&P 500 targets. The bond market is telling us they firmly believe Fed Chair Powell has rolled up his sleeves and is ready for this fight with inflation to get ugly. It appears that a hard landing is becoming more likely and that is driving this current round of risk aversion.

Every time we get a better-than-expected economic reading, traders are anticipating that will allow the Fed to be even more aggressive with tightening of policy.  Today’s US flash PMIs showed business activity improved and while input-cost inflation cooled.  The rest of the world is seeing strong contraction readings and that will keep the stock market selling pressure widespread. 

With one week left in the quarter, Goldman Sachs had to admit they were wrong with their optimistic stock market outlook and sliced their end of year S&P 500 target from 4,300 points to 3,600, which would be below the June low.

A lot of traders expected hints of a Fed pivot at Jackson Hole or at the September FOMC policy, but that never happened. A hard landing is becoming the base case scenario for many and that means more economic pain along with a much weaker stock market is coming.

How far we go below the summer lows is anyone’s guess.  Over the next couple of weeks, long-term investors may hesitate buying into weakness because it doesn’t seem like any economic data release or Fed speak will convince markets that a downshift from this aggressive tightening campaign will be happening anytime soon.  Downside targets for the S&P 500 include the 3,470 level, which might look attractive for some long-term investors. 

FX

The British pound collapsed after Chancellor of the Exchequer Kwarteng’s fiscal statement.  Financial markets abandoned bets on the British pound and UK bonds as foreign investors doubt the government will be able to fund this new round of debt.  The British pound is sharply lower on the market’s rejection of this fiscal handout that includes both the biggest tax cut in half a century and investment incentives.

Oil prices slide

Oil tanks as global growth concerns hit panic mode given a chorus of central bank commitments to fight inflation.  It seems central banks are poised to remain aggressive with rate hikes and that will weaken both economic activity and the short-term crude demand outlook. The dollar rally is about to enter another level that could keep the pressure on commodities, especially oil prices. 

Rig counts continue their steady rise, climbing by 3 and bringing the total to 602. The steady climb in rigs however has not led to any significant increases with US production. 

Once WTI crude broke below the $80 level, technical selling was persistent. Despite all the bearishness that is hitting oil prices, economic activity isn’t falling off a cliff.

Next week, energy traders will pay close attention to a tropical depression that could become a hurricane that is headed towards Florida.

 If the selling remains strong at the start of next week, major support now resides at the $74 level. 

Gold

Gold continues to get picked on as global bond yields at the short-end of the curve skyrocket.  Everything is going wrong for gold; Strong dollar, weakening jewelry demand as China’s outlook continues to deteriorate, central banks are not focusing on buying bullion, and the bond market remains its worst enemy. If gold’s selling pressure remains, prices could tumble towards the psychological $1600 level.

Crypto

It is an ugly day on Wall Street and no one is surprised bitcoin is lower.  Risky assets are getting hit hard as a wrath of global central bank tightening is leading many to think hard economic times are upon us.  Despite today’s crypto weakness, Bitcoin selling has not made a clear attempt at the summer lows. Bitcoin is only $1000 away from June low, so traders will pay close to attention to what happens over the weekend.  Weekend volatility could be interesting here and if a breach of the summer low occurs, don’t be surprised if that does not last until Asia opens on Sunday night.

On a day when stocks are down over 2%, you would expect bitcoin to be down double or triple that and not just around 3% weaker, which could mean many long-term holders remain unfazed. 

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