By Craig Erlam
Tuesday was a mixed day that saw European indices slip a little into the red, while Wall Street enjoyed better returns of more than 1%.
US equities managed decent gains even as yields continue to head higher and traders are forced to consider the possibility of 75 basis point increases, something not seen in almost three decades.
That is what James Bullard has indicated, although even he – one of the more hawkish members of the FOMC – acknowledged that is not his base case, at the moment. Still, the prospect of even more aggressive tightening can’t sit well with investors, despite the resilience they’ve shown in recent months.
It’s been a turbulent few months for stock markets, with investors facing the prospect of higher inflation, faster rate hikes, lower growth and a prolonged war in Ukraine. And yet as we navigate through the early stages of the first quarter earnings season, we’re continuing to see the kind of resilience we often associate with stock markets, particularly those in the US.
And it comes as organisations like the IMF and World Bank lower growth and raise inflation forecasts for this year and next. Naturally, some countries are coming off worse than others, with the UK situation looking particularly bleak.
And with Russia intensifying its attacks and talks appear to have hit a brick wall, the prospect of a ceasefire being agreed upon looks increasingly unlikely any time soon. That should keep commodity prices high and further fuel inflation and interest rate concerns.
The cost-of-living crisis is only going to get worse, it seems.
Oil slips, upside risks remain
Another volatile day of trade in oil markets has seen Brent and WTI falling around 5%. Lower growth forecasts and slower Chinese growth at the end of the first quarter amid lockdowns appear to have driven the bulk of the move, although it comes following a strong four-day rally after the world’s second-largest economy started easing restrictions.
There remain plenty of upside risks to the oil price, even at these levels, which makes Tuesday’s large declines all the more interesting.
Protests in Libya have knocked out half a million barrels per day of output which contributed to Monday’s rally. While this is only a temporary hit, it comes at a bad time as far as global supply is concerned.
As was evidenced by reports of OPEC+ compliance hitting 157% in March, up from 132% in February, the alliance produced 1.45 mln bpd less than it promised as part of the deal to gradually return output to pre-pandemic levels.
Gold profit-taking at $2,000
Gold prices neared $2,000 on Monday, but have since pulled back and were down a little over 1% on Tuesday.
This comes as yields continue to rise, along with the dollar, which may be limiting the upside in the yellow metal, even as inflation remains a major problem and investors cling on to safe havens.
Still, while we may be seeing a corrective move, the recent trend has been strong and we may see further runs at $2,000, despite initial profit-taking.
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.
