By Craig Erlam
The stock market recovery has stalled this week, despite indices ending on a positive note as investors digest the latest speak from central banks.
Naturally, front and centre is the Federal Reserve which has notably become more hawkish, something the minutes confirmed is not just a knee-jerk response to the latest economic reports.
We all expect James Bullard at this point to be at the more hawkish end of the spectrum, so his call this week for rates to hit 3.5% this year didn’t cause the shock and awe it would have had they come from certain other members.
Lael Brainard’s admission on rates and the balance sheet caused more of a shudder, despite being less aggressive, and were later confirmed by the minutes themselves.
But as ever, investors are taking the prospect of high inflation and rapid rate hikes in their stride and appear relatively undeterred. The yield curve has normalised a little over the course of the week which means the dreaded 2/10 inversion has reversed, providing some relief. I imagine there’ll be plenty more wild swings over the coming weeks.
CBR cuts rates and eyes more
The Bank of Russia is seemingly buoyed by recent actions from the Kremlin, despite severe sanctions continuing to be imposed by the West. The capital controls that have been imposed have helped to shore up the rouble which appears to have given the CBR confidence that interest rates no longer need to be so high.
It cut the Key Rate by 3% and left the door open to further cuts depending on financial and economic conditions. At 17%, the rate remains extremely high as inflation is still expected to spike and the economy severely contract. Given how markets have responded, the CBR may well follow up with further easing later this month.
Oil hovers around $100
A second weekly decline in oil prices has eased some of the pressures going forward, thanks to a combination of factors including huge SPR releases and Chinese lockdowns. Still, at around $100 a barrel, prices are very high and there remain significant upside risks going forward.
How prolonged and widespread Chinese lockdowns become could be a key factor in the short-term, with it being such a large consumer and some cities with very few cases already imposing harsh restrictions.
The zero-Covid approach in Beijing could weigh heavily on economic activity, with the hope that a quick eradication can once again see it rapidly spring back. If not, it could help keep a lid on oil prices.
Gold consolidates further
Gold is trading around the same level as Thursday, the day before that, the day before that and so on.
Despite the spike in volatility seen elsewhere this week, as a result of the hawkish Fed shift, gold has been unmoved.
We continue to see consolidation in the yellow metal, with the daily ranges tightening rather than widening as you may have expected. There are multiple forces at play here, but traders are seemingly clinging to their traditional inflation hedge and safe haven.
Bitcoin seeing support
It’s been a rough week for bitcoin which has been hammered by deteriorating risk appetite just after it broke through a major resistance level.
The recovery of risk has only seen it stabilise, which is interesting given the momentum it had prior to this period. It has found some support around $43,000 which is the 50% retracement of the March lows to highs and also coincides with the pre-breakout resistance.
Maybe just a coincidence, but certainly a level to watch.
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.