By Craig Erlam
European stocks are making steady gains on Monday, recovering a small portion of last week’s heavy losses as economic concerns mounted.
There’s been a shift in the market mindset over the last week and a half that has weighed heavily on risk assets. The prospect of a recession is being considered far more broadly and what’s more, central banks are increasingly resisting the urge to push back against it.
It seems inflation has gone from being the primary concern to the only one. Sacrificing the economy in pursuit of price stability appears to have become the objective through a lack of alternatives.
The hope now is that any recession will be mild and brief, but the situation is evolving so rapidly, that it’s hard to know with any real certainty.
Under the circumstances, there may be additional sensitivity to central bank speak and economic data. At current levels, investors are looking for clues that inflation is abating which could allow for a welcome relief rally in stock markets.
In the absence of that, they’re not likely to be comforted by what they hear.
There’s no shortage of central bank appearances, which could make for another week of frayed nerves. Naturally, the headline will be Fed Chair Jerome Powell and his two-day appearance in Congress to testify on the semi-annual monetary policy report.
Later Monday we’ll hear from ECB President Christine Lagarde, less than a week after the central bank held an emergency meeting to discuss fragmentation in the euro area.
With Italian yields at an eight-year high and spreads between the periphery and core widening, the central bank decided it was best to act quickly to get on top of it.
That kind of decisive action is not something we’ve come to associate with the ECB, which could be a sign of lessons being learned or, more realistically, an indication of how concerned they are about inflation and the knock-on effects of the policy action that’s required.
The bank holiday in the US could lend itself to a relatively calm start to the week, with investors already having one eye on Powell’s testimony. That said, in these markets, nothing is guaranteed and there’s no shortage of other drivers.
Oil hit by recession fears
Oil prices were steady on Monday after tumbling late last week as economic fears took hold.
The market remains extremely tight, but the threat of recession is one of the few negative forces for crude prices. Whether that will be enough to create anything more than two-way price action is another thing.
The price had been powering higher over the previous month and the bullish case remains far more convincing.
Output in Libya reportedly recovering back to 700,000 barrels per day from 100,000-150,000 could also be contributing to the slight easing in the market in the short-term.
European gas prices surged recently and it seems Russia is in no rush to ease the pressure on the bloc, having rejected an offer from Ukraine to transit more supply through its pipeline in order to accommodate for lost flows through Nord Stream.
That would appear to support the view that the move by Gazprom is politically motivated and comes at a time when Europe is filling reserves and has lost crucial US LNG supplies via the Freeport facility.
Gold building a bullish case
A volatile few weeks for gold which finds itself broadly back where it started, fluctuating around $1,850.
The good news is that a lot of monetary tightening is now priced in which is the primary bear case for it.
Heightened recession risk appears to be driving demand for the traditional safe haven which could keep it in favour going forward. Whether that will be enough to push it above $1,870 and trigger a larger rally, I’m not sure. But with recession talk getting louder, the bullish case is as good as it’s been for some time.
Bitcoin survives, but for how long?
Another lively weekend for bitcoin, which slipped below $20,000 before recovering quickly to trade back around there. While it didn’t trigger a full-on collapse in the cryptocurrency market, I have no doubt it will have made plenty nervous.
hat level has long been touted as being critical and the weekend move has seriously weakened the foundations below. The HODLer mentality is really being put to the test and those that haven’t bailed yet may be as tempted as they’ve ever been.
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.