Wall Street sign (photo: Vlad Lazarenko)
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Investors undeterred as Powell turns hawkish

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By Craig Erlam

Stock markets made decent gains on Tuesday, bouncing back quickly from the disappointment late Monday as Fed Chair Powell turned the hawkish dial up a notch.

It didn’t take long for investors to get over the latest disappointment as they prepared for interest rates rising to around 2% by the end of the year. That’s an incredible aggressive tightening cycle and would mean at least one 50 basis point hike at a meeting, something we haven’t seen in more than 20 years.

Despite recession talk rearing its ugly head as people question whether the economy can withstand such a rapid tightening, it’s clear that investors are not being deterred.

One wonders what could possibly put investors off at this stage as the yield curve is close to inverting – a recession signal – and the central bank backstop is being withdrawn.

It’s not like the situation in Ukraine is improving, even if negotiations continue with Russia.

Perhaps there’s a belief that the invasion is now priced into the markets along with high commodity prices. But that ignores the prospect of further escalations and commodity prices rising further.

Of course, there’s no simple answer to all of this. But the fact that equity markets have recovered as much as they have is no doubt interesting.

Is it complacency? A result of the buy-the-dip habit that’s proven so rewarding over the years? Or is there something more fundamental?

Powell seems to believe the economy can withstand such a sharp increase in interest rates. Maybe investors share his optimism.

Oil pares gains

A 7% surge in oil prices on Monday was always going to be difficult to sustain and Tuesday’s modest declines are a reflection of that. Whether fuelled by the prospect of an EU ban on Russian imports, Chinese lockdowns being less economically restrictive, or the dimming prospects for substantial Saudi output increases, it seems oil traders aren’t willing to give up gains that easy.

It’s going to be tough for the EU to agree on a ban that isn’t phased-in over time as they’re simply too reliant on Russian oil.

In years gone by, maybe. But supplies are too tight and it will take time to source alternative producers.

Still, Russian exports are slipping as a result of sanctions, combined with a lack of willingness to alleviate those pressures by those who can make these prices sustainable for now.

Gold to remain well supported

We continue to see consolidation in gold in what has been choppy trading conditions over the past week. The yellow metal remains in demand in the current environment, but the recovery in risk appetite has softened its appeal.

That said, inflation remains sky-high and the Russian invasion of Ukraine continues. Commodity prices have pulled back, but remain extremely elevated and the risks still appear tilted to the upside.

Gold is unlikely to fall out of favour but it could continue to consolidate around $1,900 as traders protect against the risks that lie ahead.

Bitcoin boosted alongside risk assets

Buoyed by the rebound in risk appetite on Tuesday, bitcoin jumped more than 3% and, importantly, broke above $42,000 which will put the focus back on $45,500 where it has repeatedly run into resistance.

Whether it can break beyond that may well depend on how well risk appetite holds up.

 

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.