Sell the rally, Tesla falls 10%, King dollar, oil falls, Gold breaks $1800, Bitcoin declines

Market volatility is not going away anytime soon as the ‘buy the dip’ crowd has a new motto, ‘sell the rally’.  Today’s stock market rally did not last as corporate America reminded us that supply chain troubles persist, and profit forecasts are not providing any reasons to be optimistic.  Many traders are still processing what happened yesterday with the Fed and the reality is that they missed an opportunity.  It is hard to aggressively maintain a bullish stance with equities when you know the Fed missed an opportunity going full hawk, which would lead to one last major surge in Treasury yields that would not yield a complete collapse in economic growth prospects as the Fed would be viewed as finally catching up in battling inflation.  Yesterday, the Fed should have ended their bond buying and clearly sent a strong signal for a March liftoff.    

Tesla

Tesla shares tumbled after the electric car maker said they won’t be rolling out any new model vehicles in 2022.  Investors were excited that Elon Musk was participating on the earnings call, which many saw as a sign a big announcement was happening.  Musk is focusing on self-driving and on the Tesla-robot to work in factories.  Tesla is clearly running out of momentum and the lack of a launch of a low-budget car in the mid-$20,000 range really dampens the growth outlook as the competition tries to catch up. Tesla is still the EV king and given the chip and commodity shortage problems globally, this might be the right call for the company, but most analysts will hate it. 

FX

The curve is flattening as front-end rates rise on expectations that the Fed may have to deliver more tightening.  Over the past eight Fed hiking cycles, the dollar weakened 75% of the time in the six months following the beginning of rate hikes. This time is much different than the recoveries seen in the 70s, 80s, 90s, and 2000s. Coming out of the COVID-19 pandemic and entering an unbalanced global economic recovery, with several geopolitical risks, the dollar could have some support from several opportunities that stem from some safe-haven purchases of Treasuries. The dollar outlook could appreciate further here as investors begin to price in four or five Fed rate hikes this year, but the growth potential abroad should limit that upside. 

Oil

WTI crude prices reversed earlier gains as the dollar surged following better-than-expected economic data that supported the idea that the economy can handle rapid Fed rate hikes.  No one is questioning how tight the oil market remains, but there is some exhaustion after making fresh seven-year highs and that has led to some profit-taking.  The developments in Ukraine have been constructive as diplomacy continues and while progress has not been made, a period of calm could perhaps have energy traders refrain from resorting to their buy every oil dip strategy.

The focus for many in the oil space will shift to the OPEC+ policy meeting next week which should be an easy meeting that delivers another modest production increase. The political pressure is growing for OPEC+ to deliver more barrels of crude, but they will likely stick to the expected increase of 400,000 bpd for March. With some OPEC+ members struggling to reach their quotas, any oil weakness should be limited. 

Nat Gas

US natural gas prices surged over 70% for February delivery as short sellers may have gotten squeezed out ahead of February expiration.  Many hedge funds were betting natural gas would go up as frigid weather sent demand soaring, but money managers were short. 

Gold

Gold’s pain gets worse as investors grow pessimistic over how non-interest bearing assets may perform this year now that the Fed seems poised to deliver four or five rate hikes this year. Another round of economic data supported the tightening arguments as the US economy had the strongest year in decades, while omicron likely had a short-term impact on durable goods and pending home sales. 

Gold is vulnerable to further technical selling now that the $1800 level has been breached, with $1760 providing key support.  Risk aversion will eventually lead to some flows back into bullion, but that won’t happen until this selloff is over. 

Bitcoin

Bitcoin’s rollercoaster ride is not over yet as risky assets take a hit on growing expectations that the Fed could be more aggressive tightening policy this year.  The Fed got inflation wrong and the scramble to deliver interest rate hikes this year is sending the best performing assets during the pandemic tumbling. The Fed’s aggressive fight against inflation will ease once financial conditions are threatened and that is far away.  The next couple of months will remain very choppy for crypto markets but the fundamentals still support a broadening formation for the top performing cryptos.