A Situational Awareness Selloff, a Fed Inflation Blunder and Everything Else Moving Stocks, Bonds, and the U.S. Dollar Now

As the calendar turns to August, the “dog days of summer” lie just ahead —during which time many traders and investors head for the sidelines to enjoy family vacations and other late-summer outdoor activities. However, the past week has been far from the lazy, hazy summertime doldrums that many times pervade the marketplace at mid-summer. Let’s break down this week’s events in the stock, bond, and currency markets, and I’ll include my bias on price direction for each in the coming weeks.

A ‘Situational Awareness’ Hiccup in the Stock Market 

Leopold Aschenbrenner’s hedge fund, Situational Awareness, at mid-week was forced to sell billions of dollars of technology investments that had rapidly lost value, as nervous banks began to demand more collateral for his trades. Billionaire Ken Griffin’s Citadel hedge fund reached out to Situational Awareness and snapped up the investments at a discount, after a conversation between Griffin and Aschenbrenner. Aschenbrenner’s firm has watched its assets plunge, but Situational Awareness remains one of the biggest equity hedge funds in the world and is set to come out only bruised as it is still up 80% on the year. 

The U.S. stock market selloff on Wednesday was “completely unwarranted to be honest,” said Vuk Vukovic, chief investment officer at Oraclum Capital. “There had to be something else behind it. Now we see what happened,” he said and as reported by Bloomberg. Even before this week’s margin calls, there were signs that Wall Street was starting to grow cautious, said the report.

Indeed, the S&P 500 Index ($SPX) has spent the summer grinding sideways, and mostly recently sideways to lower, at elevated levels. In the meantime, the tech-heavy Nasdaq ($NASX) has been trending down since early June, plagued by worries that AI-related spending won’t pay off, especially as China has just come out with cheaper and apparently competitive AI technology. 

The “sell in May and go away” adage has been an accurate one for the Nasdaq. While the dog days of summer lie just ahead, veteran stock market watchers are already concerned, with good reason. 

My bias: With the historically equity-market-turbulent months of September and October not far off, the wobbly S&P and Nasdaq indexes over the summer will likely provide bears with extra momentum heading into autumn. After Labor Day, I look for bears to become more confident and for more selling pressure to emerge in the stock indexes, due to inflation worries amid high energy prices and lingering geopolitical turbulence.

Greenback Slumps Post-FOMC Meeting

The U.S. dollar on the foreign exchange market is headed for its worst week in three months on concerns the Federal Reserve won’t move forcefully enough to contain inflation. Bloomberg’s Dollar Spot Index is on course for a 1.2% slump in the past five days. While the gauge recovered some ground today, it remains near the weakest level in over a month.

“The greenback’s retreat despite higher U.S. bond yields — which would typically support the currency — reflects angst over the Fed’s credibility. Chair Kevin Warsh is facing scrutiny after his messaging stoked worries that the central bank may hold off raising rates and allow inflation to remain above target. Long-dated Treasury yields are at their highest since 2007,” said a Bloomberg report overnight. 

Efforts by Japanese authorities to shore up the yen also added to pressure on the dollar. Intervention saw the Japanese currency surge as much as 3.3% versus the dollar in New York trading on Thursday, although it has since pared its advance after the Bank of Japan left interest rates unchanged today.

My Bias: Near-term technical damage has been inflicted for the U.S. dollar index ($DXY), suggesting a near-term market top is in place and that the USDX price will trend sideways at best, but most likely sideways to lower, in the coming weeks, or longer.

Warsh’s Honeymoon Is Over: The Bond Market Just Fired a Warning Shot

Longer-term U.S. Treasury yields are holding near 19-year highs after new Fed chairman Kevin Warsh failed to convince traders and investors he will successfully fight inflation.

Six weeks into the job, Warsh has learned the hard way that the bond market grades press conferences in real time. His Wednesday remarks after the FOMC meeting, which suggested rising bond yields might substitute for rate hikes, triggered a selloff that pushed longer-term Treasury yields to their highest levels since 2007, and Thursday’s uneasy calm came with an explicit message from investors: Prove the Fed is still serious about inflation, or the next move will be uglier, reported Jim Wiesemeyer with Ag Bull Media this morning.

“The mechanics of Wednesday’s move are what set off alarm bells. In a routine inflation scare, yields rise across the curve. This time the curve twisted: yields on longer-term Treasurys surged while short-term yields actually fell. That combination has a specific meaning to bond traders. It says the market believes the Fed will wait too long to raise rates, allow inflation to become more entrenched, and then be forced to hike far more aggressively later. Investors were, in effect, pricing in a policy mistake,” said Wiesemeyer’s report.

The 10-year yield climbed from roughly 4.21% toward 4.35% and the 30-year from about 4.61% toward 4.71% over Wednesday and Thursday, leaving both near their highest marks in 19 years. Short rates, which track the Fed’s near-term policy path, slipped — a sign traders trimmed bets on a prompt hike even as they demanded more compensation for holding long-dated debt.

My Bias: It appears the inflation genie is out of the bottle, and the Federal Reserve and other central banks will likely be dealing with problematic inflation for at least the next year. This is mostly due to geopolitics (namely two ongoing wars) driving up energy costs and crimping global commerce due to shipping constraints. That means higher bond yields (lower prices) over the same period. 

Let me know what you think! I enjoy hearing from my valued Barchart readers worldwide. And I answer all your emails. Email me at jim@jimwyckoff.com.