Risk Aversion Sweeps Across Europe

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

We’re seeing no shortage of risk-aversion in European markets at the end of the week while US futures are treading water ahead of the hotly anticipated inflation data.

European stocks are suffering an ECB hangover as a hawkish Christine Lagarde warned about the danger of inflation and the need to act straight away. Well, almost straight away. In July, actually, because inflation poses an immediate risk but as with the Fed earlier this year, it’s not urgent enough to break a promise on gradually phasing out bond-buying while leaving a gap between the end of net asset purchases and rate hikes. Policymakers have strange priorities at times.

But that’s fine because then in September and probably October, they can raise rates by 50 basis points as a result of unforeseen pressures and at some point acknowledge they should have moved sooner. That would be easier to stomach if the ECB, like the rest of us, hadn’t watched all year while its peers followed the same playbook to their own detriment. It’s no wonder investors have thrown in the towel.

Will the CPI data deliver another blow?

The Fed has already embarked on its first of many super-sized rate hikes and today’s inflation data may offer some insight into how many are going to be required. There was an immense disappointment last month when the CPI data didn’t fall as far from the peak as expected. That may be a blip but another one or two higher than forecast prints may deliver a serious blow to investors, the Fed and ultimately the economy.

It’s been a year of disappointment on the inflation front as prices have risen much faster and further than anyone expected and become more ingrained in the economy. A slower deceleration on top of that will feed the recessionary fears and stock markets could suffer the consequences.

Hard to make a bearish case for oil

Oil prices are continuing to rise at the end of the week, as extreme tightness in the market was compounded by the US driving season, Norwegian oil strikes this weekend and a near-fatal blow to the Iranian nuclear deal. The gains could have been more significant if not for a setback in the reopening of Shanghai as fresh restrictions and mass testing were undertaken.

It’s hard to make a bearish case for oil prices at the minute and OPEC+ has shown itself incapable of making a difference. Those that can pump more are holding back while others are being given higher quotas they simply can’t fulfil. Meanwhile, oil prices continue to march higher.

Gold slips ahead of inflation data

Gold is slipping a little ahead of the US inflation data but remains well within the range of recent weeks. Today could be the day it breaks out with all eyes on the CPI reading. A stronger reading would be a massive blow to risk appetite and be seen as further evidence of the job the Fed has to get price pressures under control. Which means yields could jump again along with the dollar, pressuring the yellow metal. A weaker reading could deliver the opposite.

Wake up, bitcoin

Bitcoin is still trading around $30,000 and I’m sure crypto traders will be hoping for an inflation surprise one way or another in order to jolt bitcoin back to life. We’ve had brief spurts of volatility but it’s barely moved from $30,000 for the last month.