We’re seeing a small recovery in stock markets on Tuesday, as investors dust themselves off following the rout at the start of the week.
There’s clearly a huge amount of worry about a recession in the markets at the minute as central banks continue to aggressively tighten against the backdrop of a slowing economy and a cost-of-living crisis. There’s a lot of pressure on household budgets and it’s only going to intensify as the year progresses which will take its toll.
The Bank of England alluded to that last week, with a recession now expected later this year as energy prices surge once more. While the Fed and others may still be more optimistic about their prospects, with a soft landing still the base case in the US, many are sceptical it can be achieved.
Given the record of central banks in correctly anticipating the path of inflation and interest rates over the last 12 months, perhaps investors are right to treat their forecasts with a large dose of scepticism. The inflation data from the US on Wednesday will naturally be heavily scrutinized as a result, with investors looking for signs of pressure easing. We’ll need to see a sharp decline in the coming months for concerns to abate.
Comments from policymakers will also naturally be poured over for signs of evolving attitudes within the central banks. Most notably whether there is increased support for 75 basis point hikes from the Fed. We have a plethora of speakers from the Fed today including John Williams, Loretta Mester, Christopher Waller, Neel Kashkari, Raphael Bostic and Thomas Barkin.
Oil slips closer to $100
Oil prices are slightly lower again today and not far from double-digit territory as traders grapple with the prospect of recessions and a tightening of Chinese restrictions. The unwillingness and, more accurately, inability of OPEC+ to turn the taps on more is keeping oil prices very elevated but at a little over $100, it’s more comfortable than was looking probable at times over the last couple of months.
The EU struggling to find a coordinated response on Russian oil is possibly helping to alleviate some near-term pressures, although progress with Hungary is reportedly being made. This also comes as some OPEC members warn of dwindling energy capacity as a result of underinvestment, perhaps a sign that we should get used to these higher prices.
Gold struggling as central banks raise their game
Uncertainty and risk aversion in the markets is doing little to support gold at the moment, with the dollar instead being favoured and the yellow metal under heavy pressure. Since coming within a whisker of $2,000 a few weeks ago, gold has fallen more than 7% and looks vulnerable to further losses.
Inflation is still extremely high and economic uncertainty is weighing heavily on risk assets. But central banks are being very aggressive to try and contain price pressures which appears to be getting in the way of gold retaining the gains it made earlier in the year when they were still in denial.
A small recovery
Bitcoin is making small gains after getting hammered on Monday. Much higher interest rates and investors ditching risky assets are creating very uncomfortable conditions for cryptos which haven’t had to deal with these circumstances before. How much appetite will there be for instruments like bitcoin if rates keep rising? It’s all well and good performing well in a world of seemingly unlimited cheap money but the new reality will be far more challenging. A break of $30,000 could deliver much more pain for bitcoin.