The Ship Has Sailed

Stock markets staged a surprisingly good recovery following the inflation data on Wednesday but that wasn’t enough to stop them from ending the day in the red, or starting today in a similar position.

Recession fears have fully gripped the markets and central banks are left with little alternative but to tighten aggressively into it. The CPI data yesterday was the latest in a long list of disappointing releases from the US and the result is that it’s now a coin toss between a 75 and 100 basis points hike in two weeks.

The Bank of Canada made the leap into triple-digit hikes shortly after the US CPI release, acknowledging in the process that it had underestimated inflation since Spring last year. They aren’t alone in that and now central banks are queueing up to hike aggressively in a desperate attempt to get it back under control and limit the shock to the economy.

Investors are clearly now of the view that the ship has sailed on that and the job now is ensuring any recession is shallow and brief. The expectation now is that the Fed will hike aggressively before reversing course in the middle of next year in order to stimulate the economy out of recession. Even that is looking optimistic at this point.

Oil tumbles as IEA revises down demand growth

Oil prices are continuing to trend lower as we move towards the end of the week, with recession fears once again the driving force. The IEA alluded to economic risks in its monthly oil report, in which it downgraded demand growth this year and next by 100,000 barrels per day.

The downward revision would have been larger but for the stronger rebound in developing and emerging economies led by China. I expect those forecasts will be downgraded further as the economic reality begins to bite.

Gold slides again on stronger dollar

Gold is off more than 1% as the dollar continues to drive higher. The yellow metal is feeling the heat from the inflation data and aggressive tightening in response. We could see its popularity improve once we see the peak in the inflation data, which we may now have in the US, but its tendency for upside surprises will leave investors cautious.

Once the peak is in place and we see signs of inflation pressures retreating, we could see gold back in favour as the economy drifts into recession. For now, a break of $1,700 is looking very possible, with $1,680 then key. There may well be more pain to come for gold.

Still hard to make a bullish case for bitcoin

Bitcoin continues to hold on surprisingly well under the circumstances. Widespread risk aversion, higher inflation and interest rates, a stronger dollar and negative crypto headlines – Celsius has filed for bankruptcy – would ordinarily hit the price hard but it’s showing remarkable resilience.

Whether it can continue to swim against the tide, I’m not so sure. What we’re seeing is impressive but I struggle to see the case for bitcoin having bottomed. Time will tell.