US Close: Wild start on Wall Street, Biden’s Tax Fantasy, Apple’s Warning, China Lockdowns send oil lower, King Dollar sends gold lower, Bitcoin breakout

It’s been a bumpy start to the trading week as bond yields remain elevated as inflation fears continue to chip away whatever solid footing remains for the US economy. It is not 1970s style inflation yet, but eventually risk appetite will struggle as the robust consumer demand softens.  Stocks have been resilient and have been somewhat supported on hopes that both the war in Ukraine won’t be a long one and that a lot of the inflation we are currently seeing will ease in the second half of the year.  The longer this war lasts, the greater stagflation risks grow and that should be unsettling for stocks.  Wall Street might be poised for some sideways price action for equities given all the persistent uncertainty with geopolitical risks.

US stocks turned positive after the Financial Times reported that Ukrainian and Russian negotiators are reportedly discussing a pause in hostilities as part of deal along with Ukraine abandoning NATO membership.  

Biden’s Plan

President Biden’s budget/tax plan received immediate scrutiny from Wall Street.  Biden’s $5.8 trillion budget would provide more money for defense spending and support for Ukraine, while targeting the wealthiest. The tax plan takes aim at the top 20,000 households with a minimum 20% rate on income over $100 million, which would include unrealized gains.  Wall Street was hoping Biden would look at the upcoming midterm elections and focus on fighting inflation and not targeting the rich. This won’t stand a chance of passing and probably wastes time in trying to pass something meaningful.

Apple

Apple shares initially fell after reports the iPhone maker was about to cut production of its new iPhone SE by 20%.  Weakening demand is a direct result of the war in Ukraine and that unexpected hit could continue if inflation continues to run wild.  Apple devices are expensive and if stagflation risks grow, the Cupertino, California-based company might start to lose market share.

Oil

Crude prices declined after sweeping restrictions hit Shanghai as China battles its worst COVID spread since the beginning of the pandemic.  Oil prices didn’t have a chance today given the hit to the short-term crude demand outlook and as king dollar dragged all commodity prices lower.

It is going to be a bumpy ride for oil as OPEC+ likely to stay the course and it doesn’t seem like Russian President Putin will make any compromises to end the war anytime soon.  With the prospects of a Iran nuclear deal revival fading, it seems the supply side of the equation should keep oil supported above the $100 level.

Gold

Gold prices can’t shake off a strong dollar. Three weeks ago, the 10-year Treasury yield was just below the 1.70% and after a hawkish turn by the Fed, the bond market has sent that yield towards the 2.50% area. If Wall Street starts becoming more convinced that the Fed is likely to deliver a string of supersized rate hikes and the bond market selloff resumes, it will be difficult for gold to get its groove back.

Gold is looking like it might consolidate between the $1900 and $1950 level as global bond market selloff appears to be only taking a break.  Until growth concerns get real, gold might struggle in the short-term.

Bitcoin

It is looking like Bitcoin bulls can’t and won’t be stopped. It looks like the commodity trade has hit a key peak and a lot of money is flowing into crypto.  A couple weeks ago, Bitcoin was looking vulnerable after a lot of money moved to the exchanges.  Normally, long-term holders that move money to exchanges occur before a big selloff, but that did not happen.

Crypto traders have seen this movie before and a major Bitcoin breakout could be here if prices hold the $47,000 level.  Once Bitcoin crosses the $50,000 level, that should trigger further retail and institutional interest.

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