By Craig Erlam
Investors are opting for caution at the end of another strong rebound week, with equity markets a little lower as we near the close.
The rebound we’ve seen over the last couple of weeks has been nothing short of extraordinary. So much so that it’s fair to suggest we’re seeing an unhealthy amount of complacency creeping into the markets.
I’m not sure what exactly is more appealing about equity markets right now. The aggressive tightening cycles of multiple central banks around the world? Sky-high inflation? Soaring commodity prices?
Or is it slight relief at negotiations while Vladimir Putin continues to commit atrocities in Ukraine without any regard for life or the slightest concern about the consequences of his actions?
I understand that markets probably fell too far against the backdrop of immense uncertainty and no light at the end of the tunnel, but when it comes to Putin and negotiations, I can’t help but think we should take apparent progress with a pinch of salt.
Instead, investors appear to be taking everything at face value, which brings me back to the complacency warning above.
This year promises to be incredibly challenging for households and businesses and without the central bank backstop propping up markets, there’s a risk that equity markets won’t just rally relentlessly and be back in record territory before you know it, as before.
Old habits die hard and “buy the dip” has been the mantra of the last decade. Time will tell whether it will be so rewarding going forward.
Oil higher as OPEC+ falls further short of targets
In a further sign that calls for OPEC+ to raise output further are a wasted effort, the International Energy Agency reported that compliance with pandemic-agreed cuts rose to 136% last month, up from 129% in January.
In other words, the group is not only failing to hit its quotas, it’s missing them by an estimated one million barrels per day, or more. And that’s before sanctions were imposed on Russia, which have disrupted its exports.
It’s starting to get a little desperate now and the situation is only going to get worse as Russia contends with western sanctions. The IEA has provided a list of ways to reduce demand as oil looks set to settle at more than $100 a barrel for a sustained period of time.
It’s easy to call on OPEC+ to do more but there’s only a small number of countries with ample spare capacity and one of those has started making noises recently around supporting increasing output. I guess we’ll see how loud their voice is and how influential Russia ultimately proves to be.
Gold eases as dollar rallies
Gold edged lower again on Friday in risk-averse trade. The yellow metal has been well favoured recently in these conditions, but we’re only seeing mild risk-aversion and not on the back of any specific developments.
It comes in a week when the Federal Reserve has turned notably more hawkish, so we may be seeing it lose a little hedge appeal on the expectations of aggressive tightening. The dollar was getting plenty of support Friday, which will also be pressuring gold.
Bitcoin continues to consolidate
Bitcoin is slightly lower again for a second session, but it’s holding above $40,000 for now. It rallied strongly on Wednesday, but failed to break above $42,000 and it’s been slipping since.
Ultimately, the consolidation continues in these uncertain markets. It remains broadly aligned with risk appetite, but the connection is certainly looser than it was earlier this year.
Craig Erlam is Senior Market Analyst, UK & EMEA at OANDA
Opinions are the author’s, not necessarily that of OANDA Global Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. Losses can exceed investments.