Stocks edge higher, focus on a less dovish Fed, oil wins

US stocks are edging higher as investors anticipate a slightly less dovish Fed at next week’s FOMC policy decision.  This week was all about the inflation report and given the reaction everyone saw in the bond market; the transitory thesis is winning.  The 10-year Treasury yield is recovering some of this week’s loss and stabilizing around 1.45%, while the 10-year real yield improves to -0.9262%.

Inflation is being pushed higher on supply chain issues and pent-up consumer spending, all of which should start to ease around the end of summer.  The next few trading sessions will likely see modest positioning ahead of the FOMC, with investors fixating on how discussions over tapering have begun.  Fed’s Harker, Kaplan, Quarles, and Mester have all signaled now is the time to start thinking about tapering. 

If next week’s FOMC decision yields a slightly less dovish Fed, a rebound in Treasury yield and the dollar could be in the cards. 

Oil

All crude prices do is win-win-win no matter what.  Even as energy markets try to price in some extra barrels of crude from Iran, most oil headlines have been bullish.  Today, OPEC+ preliminary estimate for May compliance remains high at 115%, three Norwegian labor unions could strike on June 17th over wages, and as IEA expects global oil demand to reach pre-virus levels next year.  

WTI crude is back above the $70 level, and they may stay there if Iran nuclear talks continue to drag on.  A breakthrough could happen next week, but the risks of extending talks are growing.  Yesterday, energy traders hit the sell button after some sanctions were lifted.  Later, it was realized that the State and Treasury Departments unveiled new sanctions on over a dozen Iranian individuals. 

The crude demand recovery is looking so strong that even if Iran's output sees an extra 500,000 bpd returned by the third quarter, Brent could top $80 by the end of the year. 

Gold

Gold is ending the week on a down note as Treasury yields rebound.  Gold’s best friend is an uber dovish Fed and that could be at risk next week.  Expectations remain that the Fed will stick to the 'inflation is transitory script' is high, but recent gains in labor and a red-hot inflation number will raise the risk that the Fed will be less dovish. 

Gold remains stuck in a range and will struggle to break out dollar weakness resumes.  With three-month volatility on the component currency-weighted Dollar Index plunging to the lowest levels in over a year, range trading may last a while longer. 

Gold still has a lot going for it, but trade leading up to the FOMC decision could see prices settle between the $1,870 to $1,900 trading range.    

Bitcoin

Bitcoin remains stuck in no man’s land.  The excitement from El Salvador’s decision to make Bitcoin legal is waning as the crypto world waits to see if other countries follow suit.  No one is denying that the developing world will likely continue to embrace Bitcoin, but the big question on Wall Street is when will the institutional buyer return.  A JPMorgan analyst warned that a Bitcoin bear market could be on its way and not many would argue that if Bitcoin struggles to attract new investors. 

Bitcoin is surviving a difficult environment as regulatory fears intensify and the rush to reduce its carbon footprint grows.  The China crackdown led to the creation of the Bitcoin Mining Council which for the most part has alleviated some traders’ fears.  If the council can prove to corporate America that miners are using less computing power and energy to verify transactions, that could be what is needed to start attracting big money.  

Bitcoin’s $30,000 to $40,000 trading range should remain intact a while longer.