Bug In Search Of Windshield

S&P 500 lackluster performance gave way to heavy selling right before the close, when the wheels came simultaneously off the stock and corporate bond market just as the prior Wednesday. This time though, VIX isn‘t spiking to force algos to rebalance their volatility weighted positions, meaning there‘s one less support for the bulls in the short run. Equally dangerously, the put/call ratio moved to its second-lowest May reading yesterday, highlighting plenty of room to jack up risk-off positioning next.

The Fed minutes aren‘t likely to quell the inflationary fears when the central bank‘s manual consists mostly of transitory inflation talking points and tolerance to upside overshoots. The market is thinking otherwise, and the speed with which stocks seem to be discounting the P&L impact of cost-push inflation sends a warning as clear as the dissipating PPI effects. Just wait for when the job market pressures add-in. In my view, the market is worrying that the Fed is losing/has lost the inflation battle.

Inflation expectations are running hotter (and so is inflation on the ground and in the pipeline hitting shortly), yet bond yields aren‘t compensating enough. That‘s the dynamic I described on May 10 right when it first appeared. As said, inflation is the tool to eventually sink stocks, and the fear is hitting value and tech alike. The S&P 500 pendulum swinging again bullish gets thus delayed until the market regains confidence as the sea of red would likely encompass the more inflation-sensitive part of precious metals (silver is much more vulnerable than gold), hottest commodities (lumber, copper), and (driven also by different reasons but still) cryptos as well. Hard to hide somewhere when even the dollar keeps tanking in line with my almost weekly calls of late (such move just helps emerging markets).

Gold and silver survived the pressure quite fine unless you look at today‘s premarket figures. The consolidation I warned about on Monday, is arriving into the sector, and miners are about to send a valuable signal as to what we can expect next with respect to the pullback unfolding. Keep in mind though that as I stated a month ago, the unavoidable inflation data bringing down real rates, are forming a bid below the metals, mainly below gold. What started as decoupling from rising nominal yields that I talked in early Mar, will continue in a more obvious way, the more the markets would worry about Fed‘s perceived control over inflation.

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