US Close: Risk Appetite is back in the driver’s seat, Stocks higher, yields lower, Dollar down, Oil rallies and Gold approaching critical resistance

After a week filled with rising pricing pressures and surging inflation expectations, alongside a slight reality check for some commodity prices, investors are starting to drink the Fed’s Kool-Aid that inflation will be transitory.  Given where the US economy is in this cycle, stocks still seem poised for gains as the growth outlook remains strong and the biggest fear is that the Fed might be slow with tapering.  Treasury yields are steadying and that should be very positive for risk appetite. 

The reopening trade is here to stay now that the CDC stated that fully vaccinated people did not need to wear face masks indoors or outdoors in most settings. The US is very confident with the fight against COVID as no one flinched at the news that the New York Yankees are in the middle of an outbreak.  It is fascinating to see how less sensitive the US is now to news of a fresh coronavirus outbreak.  The New York Yankees have eight individuals that have tested positive for COVID more than 14 days after being fully vaccinated with the Johnson & Johnson vaccine.  All but one of the cases was asymptomatic, which suggests the vaccines are working.  What is concerning many health experts is how did this outbreak occur among a highly vaccinated population.  The US is widely expected to have a very normal summer.       

FX

The dollar is lower across the board as risk appetite roared back. Global bond yields were broadly lower and that gave the greenlight for equities worldwide. 

Oil

Crude prices are rallying alongside the broader market rally as the dollar slides.  The crude demand outlook will eventually improve, but right now Europe is exercising caution due to India’s variant of the coronavirus.  India remains a key theme for the energy markets and as their curve slowly bends, that will lead to a complicated increase in production for OPEC+.    

WTI crude seems poised to be stuck in the mid-$60s, but if the dollar weakness accelerates, that could be enough to trigger a move above the March high of $67.98.     

Gold

Gold is rallying after a round of mostly disappointing economic data and as Wall Street starts to believe Treasury yields might remain heavy for a while longer. Today’s round of economic data was very supportive for gold prices.  A decent sized miss with retail sales, which really was a coming back to earth print following last month’s jump.  Industrial production declined, which will remain a theme until the chip shortage problem improves.  Lastly, consumer sentiment was dragged down on inflation fears.  The 5–10 year inflation expectations jumped to 3.1%, the highest level since 2011.  The data over the past couple of weeks will not trigger a change in the Fed’s ultra-accommodative stance. The next few months will show higher inflation forecasts, but that should start to trend lower once the base effects kick in. 

Gold’s next challenge remains recapturing the $1,855 level, which could open the floodgates for momentum traders. 

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