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A Flattening, the Aftermath of a Hawkish Fed


President of Blue Line Futures

E-mini S&P (September) / NQ (Sept)

S&P, last week’s close: Settled at 4153.50, down 58.75 on Friday and 83.00 on the week

NQ, last week’s close: Settled at 14,035, down 121.25 on Friday and up 49.25 on the week

Fundamentals: Broadly speaking, markets are still digesting last week’s activity; the Federal Reserve’s slight hawkish turn at their policy meeting and the impact of quadruple witching. U.S. benchmarks are rebounding from Friday’s late selling and divergence where Growth vastly outperformed Value. In fact, after Friday’s weakness, the NQ clung to gains of 0.35% on the week, whereas the Dow lost a whopping 3.5% in its worst week since October. Logic would tell us, if the Fed turns hawkish then rates rise and sectors such as Financials and Industrials should outperform. Last week defied that logic because the Federal Reserve caved to inflationary pressures after only two months of data, and the Bond market knows it. After revising inflation expectations to a hot 3.4% for all of 2021, from 2.4%, the yield curve has flattened significantly. The curve typically flattens when expectations for future inflation falls. Therefore, we must deduce the Bond market is calling peak inflation. Friday started with added pressures across risk-assets after St. Louis Fed President Bullard, who sees a rate hike in 2022, spoke hawkishly on CNBC and added tailwinds to the U.S Dollar. Yet, the 30-year Bond gained 0.76% on the session. Price action in the S&P sold into a gamma wall at 4160, just under two layers of our major three-star support. The entire pocket of technical support from 4160 to 4180 buoyed the tape through the session, but it gave way into the close. The flush extended to a low of 4126.75 overnight, but the S&P has rebounded by 1% ahead of the bell. The stage is now set, the Fed’s hawkish cards are on the table after their outlooks and Bullard, peak inflation is being priced in, and the quad witching flush was achieved. Where do we go from here?

We are at the onset of another week with a pivotal economic calendar. The Treasury will auction 2’s, 5’s, and 7-year Notes through midweek. Amid the flattening curve, whereas the yield on the 30-year Bond lost 13 basis points last week, that of the 5-year Note gained 13 basis points. This dynamic will certainly become a focal point. Tomorrow, Fed Chair Powell testifies before Congress. On Thursday, we look to final Q1 GDP, but more importantly, Friday brings the Core PCE Index, the Federal Reserve’s preferred inflation indicator.

Now, it is all not in the back half of the week as Fed speakers are littered throughout. Today, we are most eager to hear from NY Fed President Williams at 2:00 pm CT. He leans on the dovish side and if the Fed were to continue playing the Jekyll and Hyde game we have detailed here before, it would make perfect sense for tables to be turned; now that Bullard, a 2022 voter, flushed out the hawkishness, the committee can stage a more dovish rhetoric beginning with Williams today and followed by San Francisco Fed President Daly tomorrow. Lastly, remember Fed Chair Powell stayed neutral to arguably dovish in his post-FOMC presser last week.

Technicals: The trend remains very positive. Despite Friday’s weakness, today could secure a quick bottom and point to an even quicker recovery. The low in the S&P last night briefly breached major three-star support at 4139-4141.75, but we still find this level technically significant intraday. The rebound finds itself at our Pivot, a point of balance, at 4163.50-4167.25 that aligns with our momentum indicator; continued action above here through the first hour opens the door for added buying. There is strong resistance overhead; the overnight high hit the .382 retracement from the new low to the record high, this is also an area that incurred solid volume on Friday. Above there, the recurring 4183.75 reemerges as the high upon the opening bell Friday and is denoted as major three-star resistance. Further overhead, we will look to our rare major four-star resistance, in which a close above becomes extremely bullish at … Sign up for a Free Trial at Blue Line Futures to have our entire fundamental and technical outlook, actionable bias, and proprietary levels for the markets you trade emailed each morning.

Crude Oil (August)

Last week’s close: Settled at 71.29, up 0.51 on Friday and 0.69 on the week

Fundamentals: Crude Oil traded better overnight but has pared all gains; although it took out Friday’s high, it stalled in front of Thursday’s high and Wednesday’s settlement. Tailwinds came from the election of Ebrahim Raisi as Iran’s President. We have noted here over the last week, he is a hardliner on the U.S. sanctions list. As the front-runner, the market had begun pricing in an increasingly difficult path to a Nuclear Deal as Iran wants him removed before signing anything. Also supporting the tape are TSA checkpoint numbers and Bank of America saying $100 Brent is possible. Last Thursday more than 2 million travelers were counted for the first weekday (non-Friday). Furthermore, a new record of 2.1 million was tapped yesterday. Bank of America noted that $100 could be reached amid a tightening supply/demand landscape. There are many positive narratives, but as the week unfolds into inventory data, Gasoline demand will be under the microscope.

Technicals: Price action held ground terrifically amid waves of selling in the second half of last week. We now see a higher floor building at the psychological $70 mark which comes in as major three-star support at 69.87-70.05. There is first key support in front of that aligning with the July peak at 70.65 and the August close the prior week. Despite the roll into August, we will maintain major three-star resistance at … Sign up for a Free Trial at Blue Line Futures to have our entire fundamental and technical outlook, actionable bias, and proprietary levels for the markets you trade emailed each morning.

Gold (August) / Silver (July)

Gold, last week’s close: Settled at 1769, down 5.8 on Friday and 110.6 on the week

Silver, last week’s close: Settled at 25.969, up 0.113 on Friday and down 2.177 on the week

Fundamentals: Gold and Silver are attempting to stabilize from last week’s bloodbath. A bludgeoning that we certainly feel was exacerbated by niche market participants; forced leveraged selling, hedge funds stepping on shorts, and algos. It goes unsaid, we believe there is tremendous value down here over all time frames and we imagine Gold and Silver both finish the month of June higher than Friday’s settlement. We dove into the Fed’s hawkish narrative in our S&P/NQ section and the flattening yield curve. In short, we do believe much of the Fed’s hawkish rhetoric was flushed out from the FOMC policy projections and Bullard’s comments Friday. This opens the door for their Jekyll and Hyde approach which we have discussed many times before, but now with the tables turned; dovish committee members will now express their opinion. In comes NY Fed President Williams’ speech today at 2:00 pm CT.

Technicals: We do expect both Gold and Silver to rebound from here and therefore have reintroduced a very cautious, yet slightly Bullish Bias. Still, it must be understood there is severe technical damage overhead and longs who are able to capitalize from these levels must look to capitalize into the regions of significant resistance, most specifically this is 1827.5-1830.5 in Gold. Our Pivots come in at … Sign up for a Free Trial at Blue Line Futures to have our entire fundamental and technical outlook, actionable bias, and proprietary levels for the markets you trade emailed each morning.

Originally Posted on June 21, 2021 – A Flattening, the Aftermath of a Hawkish Fed 

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