1. Moving the markets

While the Dow peeked above its unchanged line early on, that visit was an ephemeral one because the index shortly thereafter joined the S&P 500 and Nasdaq in the red. The slipping and sliding continued throughout the session with dip buyers being conspicuously absent.

Things got worse mid-day after Russia reported that they were ready for a “final stage” of the Donbas liberation and that other tasks had been completed, as ZH reported:

The markets having soared on optimism yesterday amid chatter of Russian forces retreating, Ukrainian President Zelensky poured some cold water on that hope by noting that Russia is sending new forces during a speech to the Norwegian parliament. He also warned that he sees risk in the Black Sea from Russian mines.

His comments follow a statement from the Kremlin said there are no breakthroughs in talks with Ukraine.

That was good news for Gold, with precious metal jumping and closing the day with a +1.15% gain, while Crude Oil joined the party by advancing +2.84%.

And just like that, yesterday’s peace optimism got put on hold assisted by some hawkish talk by various Fed mouth pieces. Even a decent ADP jobs report could not offset the reality of the moment. A short squeeze attempt hit a brick wall leaving the major indexes to follow the path of least resistance.

For a change, bond yields backed off their recent highs with the 10-year dropping 5 bps. The US Dollar fell back to almost touch the lows of the month.  

In terms of future rate hikes, and subsequent rate cuts, this chart presents the latest update with the markets now expecting 9 more hikes in 2022, creating a recession, which then will be followed by 3 cuts in 2023/24. The latter is what stocks have been focusing on.

1. Moving the markets

The winning steak continued and was supported by increased hopes that a Russian-Ukraine ceasefire may be on deck, despite the warring parties saying that they are not close to deal. Phrases like “nothing is agreed upon, unless everything is agreed upon,” took the starch out of the early bounce by mid-day, but the major indexes recovered and stormed into the close.

Financial and economic news were anything but encouraging but traders ignored the facts and stuck to their conviction that this impressive March bounce will continue and not be of limited duration.

As ZeroHedge reported, one of the most widely followed yield curves (2s10s) inverted today, which means the 2-year bond yields more than the 10-year one, an anomaly that has in the past signaled a countdown to a recession.

As Deutsche Bank’s Jim Reid notes this morning, there has never been such a directional divergence possibly because the Fed has never been as behind the curve as they are today.

For a sense of just how far behind, The Taylor Rule suggests given the current inflation rate and unemployment rate, The Fed needs to hike by an absurd sounding 1155bps (11.55%) to get back to ‘normal’…

On the economic side, ZH pointed out that Job Openings are stubbornly stuck at an all-time high with 5 million more than unemployed workers.

Then we learned that Inflation Expectations had hit record highs as ‘Hope’ crashed to 8-year lows, which is not exactly giving the economy a thumbs up.

But, none of that mattered, as the usual short-squeeze was activated and helped the bulls to regain the upward momentum, which was lost mid-day.

The divergence between bonds and stocks has been nothing short of spectacular during the past 10 days, as bonds got monkey hammered while stocks spiked. The spread between the two is now the 5^th biggest since the 2008 meltdown.

How long can that last?

1. Moving the markets

An early drop in the markets found a bottom and suddenly reversed after the Financial Times posted an article claiming this:

Russia is no longer requesting Ukraine be “denazified” and is prepared to let Kyiv join the European Union if it remains militarily non-aligned as part of ongoing ceasefire negotiations.

The draft ceasefire document does not contain any discussion of three of Russia’s initial core demands – “denazification”, “demilitarisation”, and legal protection for the Russian language in Ukraine.

Added ZH: And the market seems to be happy that the nazis can stay?

Whether this claim will hold up or not is immaterial, because the markets saw it as positive and the “digging out of a hole” process began with the major indexes closing in the green. The lead dog was the Nasdaq with +1.13%, as traders simply ignored recession fears, while the other two showed only modest gains.

Nevertheless, this turnaround pushed Crude Oil, the Energy sector and Gold lower, while bond yields fell modestly.

Analyst Edward Moya added these words of wisdom:

Geopolitical risks remain very elevated and the rally in equities over the past two weeks is impressive. The U.S. economy is still in good shape but buying every stock market dip probably won’t be the attitude for most traders going forward given how hawkish the Fed has turned.

That’s my sentiment exactly, because if the Fed is truly serious in its inflation fighting efforts via higher interest rates, the days for the stock market bulls are numbered. However, if the Fed caves again in its hiking efforts, as the bears take the upper hand, we may see a reversal in policy just like in late 2018, after which the bull market continued with full force.  

It’s interesting to note that the Russian Ruble, which got hammered into oblivion, finally stopped the bleeding, reversed course and almost wiped out all “invasion” gains. The US Dollar came back to life and rallied to 2-week highs.

What is most incredible, as ZeroHedge pointed out, is that the market is now pricing in 9 more rate hikes in 2022, which the market sees a guaranteeing a recession…and therefore the market is pricing in almost 3 rate cuts in 2023/24.

That’s why you are seeing the current rally not running out of steam—yet.