S&P 500 sold off hard after the opening spike above 4,260 failed, immediately failed. Bonds gradually joined, in a risk-off fashion, and even though TLT didn‘t plunge, tech totally did – and the same goes for value. Could have been a short-term capitulation, but I wouldn‘t really bet on that – the little earnings-driven rallies get sold off a bit too hard, bit too fast. Obviously, the countdown to Wednesday‘s FOMC is on, and a series of 50bp rate hikes beyond May is expected – yes, for June and I would say also for July, and then September looks starting to get priced in. That‘s bad for all asset classes as the sea of liquidity gets gets recognized for being dialed back – they‘re all going to suffer, including my favored commodities and precious metals. Temporarily, but still for more than a couple of weeks – the Fed doesn‘t have the bulls‘ back. The Fed is looking serious now but would take off its foot off the pedal just in time for midterms.
When I say they‘re serious, I mean that they would take on inflation at least to the degree that expectations don‘t become truly unanchored. Inflation would make a local peak, and May to June could be the right time frame for that. They may late in summer declare „victory“ even though inflation isn‘t going anywhere as the Fed would then make a U-turn, and could even go back into easing later in autumn – yes, regardless of a U.S. recession (as defined by two consecutive negative quarterly GDP prints) being not my base case scenario. Yes, I‘m counting on the Fed to back off from tightening before more trouble than deceleration hits the real economy – and as the noises about growth outweigh the unfinished inflation of the future, real assets would sniff out the dilemma, and start rising before the Fed officially makes the requested U-turn. That‘s my big picture view for the Q2 and Q3, and why it remains worthwhile to hold on to the reasonably leveraged real asset positions with all the real world supply constraints – hard to see how many months before the actual turn, we would see the first revivals there. Note that CRB Index is loathe to decline, and energy would keep leading it higher – together with agrifoods, and gold would join in.
So, what is a commodity / precious metals bull to do in these circumstances? Withstanding the panicked moves with the core position that the big players are probably slowly scaling into, put up a hedge via shorts against the (beyond tech) equities and bonds to be hit the worst (remember, bonds would turn up on truly bleeding equities and when the growth worries outweigh inflation concerns in markets‘ mind), or close the longs now only to reenter weeks later (for quite a couple of percent discount).
It must be noted though that in Nasdaq we‘re over 20% decline from the top, and S&P 500 is approaching that psychological threshold where the „consensus on Fed history“ has it that the Fed wouldn‘t be comfortable seeing steeper declines. But as I said, they‘re taking on inflation now, so they don‘t have anyone‘s back. While the false hopes would be disappointed, we‘re in for a volatile week beyond Wednesday.
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