Nasdaq falls, Bitcoin rallies

The Nasdaq Composite index led the way lower this morning, falling almost one percent before rallying to cut losses, as Federal Reserve Chair Jerome Powell testified before the House Financial Services Committee. He said that higher borrowing costs will likely be necessary to sufficiently slow the economy to bring inflation down to the 2% mandate. Interestingly, Bitcoin was up over 8%, extending its bullish run. Recession risks and rising geopolitical tensions with China could make the second half of the year more volatile than traders anticipate.

Bottom line – risk-off.

TODAY’S MAJOR NEWS

Powell again signals rate rises

Powell said inflation is still running too high even given recent moderation, with wage inflation still a problem. This could change with an increase in labor force participation, moderating wage growth and fewer job vacancies, and yet labor demand still substantially exceeds the supply of available workers. "The process of getting inflation back down to 2 percent has a long way to go," said Powell. "It will take time, however, for the full effects of monetary restraint to be realized, especially on inflation."

The Fed continues to under-estimate the strength of the factors causing this current round of inflation, continuously forecasting that it will fall back below 3% by the “end of the year” for the past couple of years. However, Wall Street has continually under-estimated the Fed’s commitment to get inflation back down to the 2% mandate. We conclude that it cannot get it back down to 2% without being more aggressive to slow the labor market.

The Fed Reserve’s ‘aggressive pause’, holding off on another interest rate rise while indicating rate hikes later this year, implies two additional rate hikes are likely this year to 5.6% – with three Fed officials see rates rising closer to 6%. "Nearly all FOMC participants expect that it will be appropriate to raise interest rates somewhat further by the end of the year," Powell said.

Chinese troops in Cuba!

As if to echo the Cuban missile crisis of 1962, when Soviet ICBMs were moved to within a hundred miles of the Florida coast, China is reportedly placing troops in Cuba, at an old Soviet listening post used to spy on the US. This certainly contributes to increased tensions, just as US Secretary of State Antony Blinken visited China, attempting to cool things.

However, tempers flared again last night, when President Biden made ill-times comments referring to Xi Jinping as a “dictator.” Tensions between China and the United States are now at an all-time high, raising fears of a deteriorating trading relationship or an “accidental” war, most notably over the issue of China’s claims to Taiwan.

China is the world’s largest importer of commodities, with a major portion of those commodities coming from the US, especially agriculture goods. To counteract this dependence, China is diversifying its purchases of agricultural and energy commodities away from the US, which could negatively impact US export demand however the politics plays out.

Bullish Bitcoin

Bitcoin (BTC) rallied strongly 8% this morning, being up closer to 80% in the past six months. Crypto commentators provide several explanations: BlackRock’s bid to create the first regulated Bitcoin ETF with daily liquidity, along with ETFs from Invesco and WisdomTree, opening up access to more investors; an exchange backed by Fidelity Digital Assets, Charles Schwab and Citadel Securities offering easy access to BTC, Bitcoin Cash, Ethereum, and Litecoin; as a hedge against other financial assets; and because it was very oversold at the end of 2022. Technically, BTC looks to have more headroom.

Bitcoin Price vs US Dollar

Source: TradingView, StoneX.

TODAY’S MAJOR MARKETS

Equity markets

• The broadly-based Russell 2000 was up 0.3% and so ahead of the pack in morning trade, with the Nasdaq Composite and S&P 500 indexes off 0.6% and 0.1% respectively (illustrating the more cyclical, interest-rate sensitive nature of tech stocks)
• Global markets were mixed, with the DAX and FTSE 100 indexes off 0.3% and 0.1%, respectively, and the Nikkei 225 up 0.6%
• The VIX, Wall Street’s fear index, fall again to 13.2 – approaching a 4-year low. (This author struggles to understand how sanguine equity markets have become given obvious ‘risk factors’)

Currencies, Bonds and Crypto

• The dollar index fell 0.4% against a basket of currencies to 101.7
• Euro/dollar was up 0.6% and Sterling/dollar was up 0.1%
• Bond yields continued to fall, with yields on 2- and 10-year Treasuries lower at 4.67% and 3.73%, respectively
• Bitcoin rallied 8.3% to $30,250, continuing to outpace the broader crypto market which was up 5.0%

Commodities

• Gold prices were unchanged at $1,947 per ounce
• Crude oil prices rose 1.8% to $72.5 per barrel, continuing its recent rally
• Grain and oilseed prices surge higher on the continued weather market as crop ratings tumble
• Soy oil prices fell their daily limit lower though after the EPA disappointed the trade with its Renewable Volume Obligations (RVO) for the next three years

Analysis by Arlan Suderman, Chief Commodities Economist (Arlan.Suderman@StoneX.com)

Market outlook by Paul Walton, Financial Writer: Paul.Walton@StoneX.com