Fed minutes as the straw to break the camel‘s back? This time, they weren‘t as uneventful as so often before, making the markets look for taper to indeed come – and sooner than expected. Quite a courageous proposition given that commercial bank credit creation isn‘t ready to take up the slack, and then some. The markets thus reassessed the short-term prospects, reacting with a modest degree of panic not only in select commodities but finally also in stocks. Seems like the few percent corrections I warned about on Tuesday as approaching, is finally here and unfolding:

(…) in the world of question marks over high pace of economic growth, it‘s the Fed that‘s between a rock and hard place.

On one hand, they have stubborn and quickening inflation to deal with (or pretend to deal with through the FOMC, the federal open mouth committee) – getting ahead of the curve means serious tightening (okay, first getting less loose monetarily, which is what taper is about). Given China‘s slowdown and corresponding U.S. figures projected, it would be a tall order to turn off the spigot into a weakening (but still growing) economy – that has potential to trigger quite a correction in stocks and risk-on assets. Note copper and oil paring recent gains, and going largely sideways for weeks – not rolling over, but the light is amber, irrespective of the infrastructure bill.

On the other hand, if the central bank does nothing, inflation would grow even more entrenched, sinking the stock market and economy over time, anyway. Don‘t forget about the massive spending – the Fed turning restrictive isn‘t the math-favored outcome here.

Bond yields aren‘t squeezing the Fed‘s hand – the market is paying more attention to growth than inflation at the moment. And that means headwinds for the reflation and commodity trades as these would find rising rates more conducive. Copper to gold ratio is seeing every spike sold since June, underlining the tug of war between the prospects of the economy roaring ahead vs. hunkering down.

Looking at the market reaction to the approaching taper (no mention of tightening – Powell learned his 2018 lesson though I still say that the Fed would have a much harder time withdrawing liquidity now), quite universal selling followed next – with the exception of the dollar, gold and to a degree Treasuries.

Taking on inflation through the dollar doesn‘t come without its own risks, though – while taking down commodities a notch or two, global growth would face headwinds too. Treasury yield spreads aren‘t yet thankfully signaling more slowdown ahead – yields look ready to keep chopping, and only very gradually to start rising again. Rising greenback though isn‘t a silver bullet in extinguishing inflation given still stubborn rent prospects (it‘s one-third of CPI) and wage pressures, let alone mounting supply chain issues when it comes to smooth international shipping (yes, China terminals restrictions, etc). And I‘m not even raising corona anymore but look for the official start of flu season (Sep 15) to get interesting, if you know what I mean.

This is the time to be picky about where to be exposed to risks, which asset classes are likely to ride the taper and growth storms best. I think it would be copper over oil, and gold over the silver. The stock market correction appears in its opening stages indeed, and cryptos still chopping around would be a great result. It‘ll take a while for the dollar to roll over to the downside, but look for it to do so over the medium to longer-term, and keep an eye on Treasuries – would be great if they confirmed my midpoint economic cycle hypothesis and didn‘t spike. Finally, I expect the Fed to come to its senses as not enough of what‘s left of the free market, would step up to the plate and finance growing „building back better“ deficits. So far, so good.

Let‘s move right into the charts (all courtesy of www.stockcharts.com).

S&P 500 and Nasdaq Outlook

Volume hasn‘t increased all that much, but look for it to change as we approach a fresh buying opportunity. For now, look for the downside risks to continue.

Credit Markets

Powerful reversal in credit markets, spelling more trouble for the riskier parts of the spectrum. Indeed as I wrote yesterday, the risk-on optimism was vulnerable to a sudden souring that would hit many advancing stocks hard.

Gold, Silver and Miners

Gold resilience in the face of weakening miners, is a good sign – look for the yellow metal to lead precious metals sector higher. Miners‘ weakness reminds me of the setup before 2016, and we know what happened over the coming months back then. Silver together with copper would improve, and the same is true about nickel – all three are a must for green economy.

Crude Oil

Energy stocks keep doing worse in such an environment, and while solid support in oil is approaching, we aren‘t there yet – the selling pressure hasn‘t really decreased.

Copper

Copper is closer to its support than oil, but the knife didn‘t stop falling yet. The volume examination is though more encouraging than in the case of black gold.

Bitcoin and Ethereum

Cryptos have pared gains, and are treading water at the moment – look for vulnerabilities to likely manifest here over the coming days too. It would be very premature and unreasonable to talk about a shift to a bearish outlook, though.

Summary

The Fed looks decided to try walking the fine line and taper, but that wouldn‘t come without its own set of consequences as described in the opening part of today‘s extensive report. Continuing with the paragraph right before the chart section…