Late Night Crash, Bailout Fails

Source: Wall Street Intelligence Circle

The global market's closing on Friday was a complete disaster: U.S. stocks, U.S. Treasuries, and gold all plunged, while oil prices continued to surge.

If there is no good news over the weekend, Monday’s opening could be another bloodbath.

The dangerous combination is now very close:

· A 4.5% yield on the 10-year U.S. Treasury (closed at 4.4%): not just an ordinary number, but the threshold at which risk assets begin to have their valuations reset (the “valuation reset switch”).

· $120 oil price (Brent crude closed at $113): the “suspension line” for global consumers, and the “economic suicide line.”

If this scenario unfolds, even if the Middle East conflict does not escalate, the market will start a big decline, and the “central bank bailout” card will be much harder to play.

Last night, the Federal Reserve launched its first market rescue since the Iran war. One hour before the U.S. stock market opened, Federal Reserve Officials Waller and Bowman both issued statements to calm the market.

Waller, in an interview with CNBCinterview, stated that he is cautious about how the soaring oil prices amid the Iran war will affect inflation. However, a weak labor market may still provide reasons for rate cuts later this year.

Bowman said she still supports three rate cuts by the end of 2026, hoping to use this to support the labor market (even bolder than the most aggressive expectations in the market).

Surprisingly, not only did the market ignore the statements from Fed officials, but actually reacted in the opposite direction—on Friday, short-term interest rate futures indicated the market now sees a more than 50% chance of a Fed rate hike in December (the logic for rate cuts has been killed).

Last night’s market action proved that the market believes the Fed’s “verbal support” can no longer compete with the “real fire” in the Middle East—we have now entered a market where “no one is backstopping.”