RBA, UK Data, Boris, Oil, Gold, Bitcoin

RBA Joins Super-Sized Club

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

Stock markets are back in the red on Tuesday, giving back the bulk of Monday’s gains in a sign of ongoing uncertainty as to the direction of equity markets and the economy.

There is clearly appetite at these levels but that’s not being backed up by the momentum of any kind. Hardly surprising given the sheer uncertainty around inflation, interest rates and the economy. Central banks are racing to catch up but that may come at a great cost.

The RBA overnight became the latest to join the super-sized club, following in the footsteps of the Fed, BoC and RBNZ, among others. The decision to hike by 50 basis points came as quite a shock to the markets, with 25 priced in ahead of the meeting. It was the biggest hike in more than two decades and another sign of policymakers belatedly recognising the urgency of the inflation problem. And there’s plenty more to come.

The ECB is very late to the party but will likely announce an end to net asset purchases on Thursday and a desire to raise rates from next month, bringing the deposit rate out of negative territory in the third quarter. This doesn’t exactly fall into the bracket of recognising the urgency but then it is the ECB, so by its standards perhaps it does.

The BoE was early to the party compared to many of its peers and it’s also been the first to concede defeat on a recession, something others may follow on in the months ahead. If today’s UK BRC retail sales data is a sign of things to come then the BoE is right to be so pessimistic. The cost-of-living crisis has well and truly arrived and the data suggests households are already cutting back. The final PMI data, while much better than the flash reading, was also a big drop from April and reflects the more pessimistic outlook.

One thing the UK won’t have to deal with (yet) is political uncertainty after Boris survived the no-confidence vote. He didn’t exactly do it in an emphatic fashion though, leaving many to believe he has merely postponed his departure rather than prevent it altogether.

Oil struggling to hold above $120

Oil is continuing to struggle at around $120 on Tuesday, with Brent and WTI very slightly lower. We’ve seen $120 broken on a few occasions over the last week but each time it’s been quickly repelled in a sign of momentum starting to run a little thin. The fundamentals remain bullish for oil prices as China continues to reopen and the OPEC+ “production hike” does little to alleviate the tightness in the market. Still, it’s been a very strong run over the last month, with the price up more than 20% from the May lows. We could potentially see some profit-taking in the short-term but it’s hard to imagine it being too severe, barring significant growth downgrades or a surge in Covid cases in China.

Gold consolidation continues

As has so often been the case in recent weeks, gold is continuing to fluctuate around $1,850 today and showing little sign of a burst in either direction. It struggled once more around $1,870 on Friday, reinforcing it as a key area of resistance to the upside, while $1,830 continues to be the first line of support below. We may have to wait for the inflation data at the end of the week for an interesting move in either direction.

Another failed break higher

Bitcoin is also trading around the same level it has for most of the last month but at least the price action this week has been a little more interesting. A 6% rally on Monday has been followed by a 6% decline today, taking bitcoin back below $30,000 and confusing crypto traders in the process. It’s really struggling to hang onto rallies much to the frustration and perhaps even concern of the crypto crowd. This remains a key level and a break to the downside could cause far more stress than it did almost a month ago.