By Jeffrey Halley
A massive risk aversion wave swept markets overnight, with the Bank of England raising rates by 0.25% to 1.0% in a split decision (three members wanted 0.50%), in line with expectations.
It’s what they said, and not what they did, that saw Sterling slump by 2.0%. The bombshell was the 2023 growth forecast, which was marked down massively to -0.25% from 1.25% previously.
The BOE basically said there was going to be a recession next year, somewhat at odds with the Federal Reserve’s statements that a soft landing was possible in the US. Overnight, BOE officials said they were going to concentrate on tackling inflation because there wasn’t much they could do to offset a slowdown.
UK consumers would, unfortunately, have to endure rising costs of living and recession headlock that would make Stone Cold Steve Austin proud.
It is of little surprise that the BOE doesn’t intend to start reducing its GBP 875 billion balance sheet yet. The only positive being the BOE will likely hike rates in small increments and let markets themselves do most of the dirty work.
That is somewhat at odds with Jerome Powell’s comments that the Fed would be able to engineer a soft landing for the US economy as it scrambles to get on top of inflation.
Given the economics experts were adamant that inflation was “transitory” last year, I’m struggling to fully buy into that, and so it seems, is the street.
Markets seemed to come to that realisation overnight, US 10-year yields climbed back through 3.0% and stayed there, and everyone knows about the bonfire in equity markets.
The Reserve Bank of India blinked on inflation this week as well with their unscheduled rate hike.
I applaud them for this, there’s no shame in effectively admitting you were incorrect and acting decisively to sort the mess out. Even an ECB member said overnight that a rate hike would be considered at the June meeting.
Considering and doing are two different things though, although if EUR/USD is around parity, their thoughts might be focused. However, their rightful get-out-of-jail card is that they are rapidly moving to oversight of a pseudo-wartime economy.
Master fence-sitting vacillators, the Reserve Bank of Australia, though, haven’t made too many friends with their guidance. Hiking rates by 0.25% earlier this week, while still playing the dovishly hawkish card.
The RBA Statement of Monetary Policy Friday morning, though, told a rather different message and I’m wondering if they were hoping nobody was watching because it’s the end of the week.
It massively raised trimmed mean inflation forecasts to 4.75% by December 2022, and 3.25% by December 2023, with core-inflation remaining above the 2-3% target band until 2024. It said it was appropriate to start normalising interest rates and that further increases would be needed to restrain inflation. Australian equities would have been battered Friday after the Wall Street slump overnight, anyway, but would probably have suffered a similar fate after the RBA SoMP release.
Slowly but surely, the central bank fence-sitters are being dragged into the inflation fight, even if they are fighting dovish rear-guard actions. The reality that inflation has returned after 20 years, that the 15 year run of the cost of capital is zero per cent is over, or that we can no longer rely on central banks to reverse flow wealth transfers to homeowners and equity investors and corporate debt Caligula’s via quantitative easing, appears to be dawning on the world.
We may well have reached peak globalisation and with China slowing, a process in place pre-covid-zero, and a war in eastern Europe that will price shock the world’s food and energy value chains, it is little surprise that equity markets might be having second thoughts about valuations, even at these levels.
Non-farm payrolls on Friday
And still, the week isn’t over, with US Non-Farm Payrolls still to come.
Market expectations are for around 400,000 jobs to be added, roughly the same as March, with unemployment edging lower to 3.50%. A sharp divergence, up or down, from the median forecast, should produce a very binary outcome given the schizophrenic nature of the short-term financial markets at the moment.
A print north of 500,000 should provoke a faster tightening by the Fed, recession equals selling equities, bonds, gold, cryptos, DM and EM FX, buy US Dollars reaction. Conversely, a print under 300,000 should see a sigh of relief less Fed tightening rally. Buy equities, bonds, gold, cryptos, DM and EM currencies and sell US Dollars. It’s that sort of market.
Thankfully, most of us still have our weekends free, but if one wants to watch the direction of travel for market sentiment, the crypto-space this weekend might be interesting to watch, especially if we get some headline bombs.
Bitcoin held support perfectly ahead of support at $37,400.00 on Wednesday, rising 5.20% in the general post FOMC relief rally.
Overnight, it lost around 8.0% and traded as low as $35,600.00, crashing through the triangle support at $37,400.00. Negative developments over the weekend could spur a sell-off to around 32,000.00 setting Monday up for a bad start.
If risk sentiment continues plummeting, the chicken bones on the technical charts suggest Bitcoin could be on its way to $28,000.00 and then 20,000.00. HODL on for dear life.
New York slump sends Asian equities lower
New York equity markets did a massive volte-face overnight and decided that Jerome Powell had been hawkish after all, and that higher rates and recession risks were a higher possibility. The Wednesday relief rally vanished into thin air as US stock markets saw every sector in every index get thrashed.
The S&P 500 tumbled by 3.55%, the Nasdaq was battered 4.99% lower, while the Dow Jones retreated by 3.12%. In Asia, US futures on all three major indexes are still catching their breath, easing by around 0.10%.
Japan is the only Asian market bucking the trend Friday, returning from the Golden Week holidays and pricing in a week’s worth of stock market volatility. That has allowed the Nikkei 225 to record an anaemic 0.63% gain, helped along by a slumping Yen. South Korea’s Kospi returns from a one-day break, but that is no solace as it falls by 1.22%.
The reaffirmation of China’s commitment to its covid-zero policy has helped an already sombre mood in China with the PBOC setting a stronger Yuan fixing, withdrawing pre-holiday liquidity, and with US delisting worries on the agenda once again.
The Shanghai Composite has fallen by 2.30%, the CSI 300 has lost 2.60%, with Hong Kong’s Hang Seng tumbling by 3.65%.
European markets gave back all their early gains overnight, moving into the red with Wall Street in afternoon trading. With the weekend arriving, with its ensuing eastern Europe event risk, there will be little reason for investors to walk in looking to buy, especially after Asia’s performance on Friday.
Oil prices trade sideways
After initially leaping higher after the proposed EU ban on Russian oil was released, oil markets have spent the past two sessions consolidating those gains. Overnight, oil traded in a wide and choppy range, but ultimately, Brent crude finished just 0.80% higher at $110.95, and WTI rose 0.95% to 108.55 a barrel. In Asia, both contracts are almost unchanged in pre-weekend trading.
Gold holding up
Like Grace Jones, gold is a slave to the rhythm, in this case, the rhythm of the US Dollar. Gold staged quite an impressive rally in early trading on Thursday, but as the US Dollar soared, it gave back all those gains to finish 0.23% lower at $1877.00 an ounce, where it remains in moribund Asian trading.
Still, given the moves seen in other asset classes, gold is holding up reasonably well. It is steady despite US 10-year yields moving above 3.0% once again, and it is definitely outperforming Bitcoin right now. That could be coincident with the return of China from holidays, or that there is more than a little risk-hedging based buying quietly going through the market.
Jeffrey Halley is Senior Market Analyst, Asia Pacific 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.