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Markets Today – Earnings, Nasdaq, ECB, CBRT, Oil, Gold, Bitcoin

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New York Stock Exchange

By Craig Erlam, Senior Market Analyst, UK & EMEA, OANDA

It’s turned into a mixed session across Europe with indices giving up earlier gains initially before reversing course once more to tread water as we near the open on Wall Street.

It appeared we could have been heading for a second consecutive positive session when Europe got things underway this morning, something we haven’t been treated to much so far this year. But it wasn’t long until we were back in the red; a further sign of the angst in the markets right now that is proving hard to shake off. Perhaps there’s still hope yet but given what we’ve seen, it won’t be cause for optimism.

The Nasdaq dropping into correction territory won’t be helping lift the mood, and that will turn more downbeat again if it breaks below the 200-day simple moving average for the first time since April 2020 when the unbelievable tech rally started. It would also take it below 15,000 for the first time since the middle of October. Not a great signal for the markets just as Netflix kicks off earnings season for big tech.

The flipside of that is that earnings could be what helps tech find some form again. There’ll no doubt be some interest around these levels and we’re already seeing futures pointing more than half a percentage point higher ahead of the open. A strong report from Netflix could see dip buyers flood back in.

The key question on investors’ minds though will be whether the tech rout is already behind us after a 10% drop. That will depend on more than just a few stellar earnings reports. The key thing will be whether we see a pause in market interest rate expectations after weeks of aggressively pricing in more hikes and balance sheet reduction.

While there are calls for more than four hikes this year, even a kickstart 50 basis point increase from the Fed in March for the first time in more than 20 years, is that going to be priced in this early? Or could we see a period of relief that could benefit stock markets if earnings season takes a turn for the better? We’ll soon see as big tech dominates the next week on the earnings calendar.

ECB remains in camp transitory

Christine Lagarde launched a strong defence of the ECB’s response to higher inflation on Thursday, warning that markets should not expect a similar approach to that taken by the Fed as the situation doesn’t warrant it. Lagarde pointed to lower inflation, which was confirmed today at 5% in December, and a weaker recovery. While that may be true, markets have been pricing in the possibility of a similar u-turn to that we’ve seen in the US and UK, with a 10 basis point increase expected in October.

The minutes reflected Lagarde’s comments, as we would expect, but that’s unlikely to change investors’ minds. Central banks have repeatedly pushed back against market expectations over the last six months before eventually aligning with them. With the German 10-year moving into positive territory for the first time since mid-2019 on Wednesday, it seems a familiar pattern may be unfolding.

New year, new CBRT?

The CBRT appears to be turning over a new leaf in 2022 after resisting the urge to cut interest rates for a fifth consecutive meeting. The central bank has cut rates from 19% to 14% in that time which has come at great expense in terms of the currency, reserves, and inflation. But it would appear that the easing cycle has run its course, for now.

That said, the explanation for current levels of high inflation and the disregard for it, and in effect its impact on households and businesses, don’t offer much assurance that the CBRT won’t at some point revert back to the damaging approach of recent months. But it may wait until inflation does ease again after reaching 36% last month.

Oil rally finally losing momentum

Oil has been on a remarkable run in recent weeks driven by very bullish fundamentals as disrupted supply struggled to keep up with strong demand. OPEC and the IEA have referenced the resilience of demand since the emergence of omicron in recent weeks and the inability of OPEC+ to hit their production targets, or even come close, has led to the kind of one way price action we’ve been witnessing.

While the fundamentals haven’t changed, it does appear that we’re finally starting to see momentum wane after a more than 30% rally from the omicron lows. That’s coming around $90 where oil has peaked at a seven-year high, seemingly triggering some profit-taking. While I don’t think it’s done there, we could see a minor correction to take some of the frothiness out of the market. That said, I can’t imagine it will be too large unless we see a shift, either in OPEC+ production or slowing demand from a major consumer like China as a result of its zero-Covid policy.

Gold breaks key resistance

Gold has been pushing for a breakout above $1,833 since the start of the year and it finally achieved it on Wednesday, which could potentially help propel it higher in the coming weeks. The move has been building despite yields rising, which may be a sign that traders don’t believe enough is being priced in to counter soaring inflation.

The yellow metal has recovered earlier losses to trade higher today, just as the dollar has lost earlier gains to trade flat. It started to struggle a little shy of $1,850 which may be the next area of resistance, with the November highs around $1,875 above here being the next test. A move lower will see $1,833 tested as support after putting up such a barrier of resistance in recent months.

A big move coming in bitcoin?

Bitcoin remains in consolidation on Thursday, with ranges tighening as the cryptocurrency struggles for any direction. It doesn’t feel like we’ll have to wait long for an aggressive breakout one way or another but at this point, it’s hard to say in which direction that will come. If interest rates are its kryptonite then it could still be in for a rough ride as anxiety around monetary tightening remains heightened. But I’m not convinced that will remain the case and it may just be a case of the cryptocurrency biding its time. I’m sure we’ll soon see which way that will come but once it breaks out of that tight range, the move could be quite substantial.

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Markets

Another Turbulent Day

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capital market - Investors King

By Craig Erlam, Senior Market Analyst, UK & EMEA, OANDA

It’s been another turbulent session after stock markets turned sharply lower on Wednesday as investors fret over the outlook for the economy this year.

Results from Walmart and Target this week have brought into sharp focus the plight facing companies and consumers as inflation begins to bite. And that’s in a country that is still performing relatively strongly with a consumer that still has plenty of savings built up over the last couple of years. Others are not in such a fortunate position.

But inflation is catching up and profit margins are taking a hit. Soon enough though, those higher costs will continue to be passed on and consumers will stop dipping into savings and start being more careful with their spending. There’s a feeling of inevitability about the economy, the question is whether we’re going to see a slowdown or a recession.

The language we’re seeing from Fed officials isn’t filling me with confidence either. We’ve gone from them being confident of a soft landing, to a softish landing and even a safe landing, as per Patrick Harker’s comments on Wednesday. I’m not sure who exactly will be comforted by this, especially given the Fed’s recent record on inflation and past record on soft landings.

And it seems investors aren’t buying it either. A combination of these factors and no doubt more has sent equity markets into another tailspin, with Wall Street registering another big day of losses on Wednesday and poised for another day in the red today. Europe, meanwhile, is also seeing substantial losses between 1% and 2%.

Oil slips as economic concerns weigh

Those economic concerns are filtering through to the oil market which is seeing the third day of losses, down a little more than 1% today. We were bound to see some form of demand destruction if households continued to be squeezed from every angle and it seems we may be seeing that expectation weigh a little as we move into the end of the week.

Meanwhile, China is reportedly looking to take advantage of discounted Russian crude to top up its reserves in a move that somewhat undermines Western sanctions. Although frankly, it would have been more surprising if they and others not involved in them didn’t explore such a move at a time of soaring oil prices.

Still, I expect Brent and WTI will remain very high for the foreseeable future, boosted by the inability of OPEC+ to deliver on its targets and the Chinese reopening.

Gold buoyed by recession fears?

Gold appears to be finally seeing some safe-haven flows as markets react strongly to the threat of recession rather than just higher interest rate expectations. The latter has driven yields higher and made the dollar more attractive while the economic woes they contribute to seem more suited to gold inflows, it seems.

It will be interesting to see how markets react in the coming weeks if the investor mindset has turned from fear of higher rates to the expectation of a significant slowdown or recession. And what that would mean for interest rate expectations going forward. Perhaps we could see gold demand return.

Can bitcoin continue to swim against the tide?

Bitcoin is holding up surprisingly well against the backdrop of such pessimism in the markets. Perhaps because it’s fueled by economic concern rather than simply interest rates. Either way, it’s still trading below $30,000 but crucially it’s not currently in freefall as we’re seeing with the Nasdaq. Whether it can continue to swim against the sentiment tide, time will tell.

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Inflation Hits 40-Year High

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By Craig Erlam, Senior Market Analyst, UK & EMEA, OANDA

European equity markets are a little flat on Wednesday, with inflation data this morning once again offering a reminder of the struggles that lie ahead.

Not that we need reminding given all of the data we’ve seen recently. And then there are the gloomy forecasts from central banks, with even the Fed now targeting a softish landing which feels very much like the stage before a mild recession. It may be time to buckle up and prepare for a very bumpy year.

Will BoE move to super-sized rate hikes?

UK inflation is running at a 40-year high and it’s not peaked yet as the cost-of-living crisis looks set to squeeze the economy into recession. While annual inflation came in slightly below expectations at 9%, pressures are broad-based and as the year progresses, it is expected to hit double figures.

There is still plenty more pain to come for households, most notably when the energy price cap increases again in October. But price increases are broad-based, as evident in the jump in core inflation to 6.2%. This comes as the Bank of England has warned of more pain and a probable recession, as it continues to aggressively raise interest rates in the hope of being able to catch up without inflicting too much harm in the process.

Like many other central banks, it has been heavily criticised for its misjudged faith in pandemic-induced inflation being transient for too long. And in the UK’s case, the problem looks far greater and more widespread, with Brexit effects compounding the problems and driving up prices. Can the BoE afford to continue raising rates so gradually, as markets expect with 25 basis points every meeting or will they be forced to join their US counterparts with super-sized hikes? Pressure is mounting.

Oil higher as China starts reopening

Oil prices are on the rise again as Shanghai takes a big step towards reopening following three days of no new cases in the broader community. Restrictions have been tight in many cities across China which have helped keep a lid on oil prices in this very tight market. But with activity now likely to pick up, crude prices could be on the rise once more.

Efforts toward a Russian oil embargo have failed, with Hungary continuing to stand in the way. That could be slowing the rally in oil still, as could US talks with Venezuela which may eventually lead to additional supply. Although ultimately, this comes at a time when major producers simply aren’t producing as much as they should. Russia saw its output fall by another 9% last month as a result of sanctions, which contributed to OPEC+ producing 2.6 million barrels below target, lifting compliance with cuts from 157% to 220%.

Gold looking shaky once more

Gold is a little lower on Wednesday, as the dollar strengthens once more following a few days of declines. We’ve seen a slight corrective move in the greenback which has eased some of the pressure on the yellow metal but we may be seeing that return already. Gold is currently trading a little over $1,800 and a break of it could trigger another wave lower as investors continue to factor in more interest rate hikes and therefore higher yields.

The path of least resistance

With risk aversion starting to creep back in, bitcoin finds itself back below $30,000 which may make some a little nervous. It was always going to be difficult for risk assets to significantly build on the rally in the current environment. What may be encouraging to some is that we haven’t seen a sharp reaction to the move back below such a key level. Of course, that could quickly change with below appearing to offer the path of least resistance.

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Further Pressure on Central Banks

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By Craig Erlam, Senior Market Analyst, UK & EMEA, OANDA

It’s been a relatively calm start to trading this week, with Europe a mixed bag at the close and the US a little lower.

The weaker Chinese figures overnight will be of some concern at a time of slowing economic activity around the world. Still, as has been the case so often in recent years, the lockdowns will have heavily distorted the data. With lockdowns priced in to an extent, the key will be how quickly restrictions are lifted and then how well the economy bounces back.

Stock markets have come under heavy pressure globally as central banks have been forced to become part of the problem rather than the solution, as has so often been their job in the past. We’ve become very used to easy monetary conditions but now we have a devastating combination of a cost-of-living crisis, looming recession, very high inflation and much higher interest rates.

And as we’re hearing so often now, policymakers understand the pain that households are feeling and will experience going forward but getting inflation back under control is the primary focus. Which means further pain ahead.

The BoE monetary policy report hearing reflected everything we’ve heard in recent weeks as the UK heads for recession and double-digit inflation. Bailey and his colleagues accept how bad the situation in the UK is and the scale of the task at hand but whether they’re doing enough to address it is hard to say. They were among the first to start hiking late last year but have still been criticised for starting too late.

Oil near recent highs after falling on Chinese data

Oil prices have recovered earlier losses that came in the wake of the Chinese figures. While lockdowns have been priced in over the weeks, the numbers were much worse than expected which weighed heavily on crude. While an EU ban on Russian oil suffered another setback as Hungary stood firm against it, the bloc is continuing to work on an agreement while Germany is reportedly planning to phase it out regardless, which could be helping to support prices today.

Oil is trading around $110, towards the upper end of where it’s traded over the last couple of months. China looking to ease restrictions could keep prices more elevated having contributed to them trading at more reasonable levels. A move above $115 in Brent would be interesting, with that having been something of a ceiling for rallies over the last couple of months.

Gold flat but remains under pressure

Gold is flat on the day after slipping this morning below $1,800 for the second time in as many sessions. The yellow metal has been very vulnerable to rising yields and a stronger dollar recently as central banks are forced into much more aggressive action. With the dollar remaining a hot favourite and pressure intensifying on central banks to tackle inflation, gold could remain out of favour for a while yet.

Bitcoin struggles at $30,000

An impressive rebound in bitcoin after breaking $30,000 may already have run its course, with the cryptocurrency giving up earlier gains to trade a little lower on the day. It’s spent a little time over the last couple of days above $30,000 but it is struggling to hang on to them. That doesn’t bode well at a time of risk aversion in the markets and such negative coverage of stablecoins following the Terra collapse. There may be more pain ahead.

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