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Discussion
With Gold down -2% this morning and Bitcoin, stocks, and rates up, it’s clear the lack of escalation in the Israel-Iran conflict over the weekend is leading market participants to reduce a good chunk, if not all, of the all-out-regional-war risk premium in equities. Based on the where IG CDX, Gold, and Oil are trading this morning versus the April 15 market close, there’s an upside gap in the Generic ES (S&P 500) contract of approximately 1.4%. However, sticky USD and lower long-term UST bond prices remain a problem for stocks, thus this bounce will likely be contained to the SPY 20dma circa $514 as discussed this weekend.
Not included in the matrix above is Bitcoin, which also confirms the risk-on advance this morning versus that April 15 closing price.
Lastly - I’ll have more to say on the Fed this week, but in a nutshell, YoY Supercore inflation is the key reason the Fed is unlikely to provide relief to asset prices until SPX is down at least -10% from the highs. Supercore inflation is the key to unlocking the “confidence” they’re looking for to begin cutting rates (see post from last August below), and not only is it not back to the pre-COVID level they want to see to be confident inflation is durably on its way back to 2%, but it’s now moving in the other direction.
Yellen/Brainard and liquidity remain powerful “puts” sitting beneath this market; but to the extent Yellen holds off on issuing a dovish QRA on May 1 and/or inflation remains a political problem for Biden, there is substantial fundamental downside to this equity market without aggressive policymaker support.
I’m going to enjoy this equity bounce through perhaps Wednesday, but it’s likely time to begin looking down, not up, on a tactical basis once SPY returns to the 20dma.