By Craig Erlam
European stock markets are falling heavily again on Wednesday, reminding us once more why we shouldn’t get excited by the bear-market rallies.
There’s a desperation to add substance to the, often sizeable, rallies that pop up in equity markets despite little or no rationale behind them. In much the same way that “if it seems too good to be true, it probably is”, if stocks are rallying for seemingly no reason, there probably isn’t one. So, it won’t last.
On Friday, I noted that triple witching days should be taken with a pinch of salt; that probably extends to the day or two after, as markets readjust. And that’s in normal times which this most certainly is not.
Another reason not to get carried away by the trade at the start of the week, which also occurred over a US bank holiday; another possible red flag.
Last week, investors had to contend with an avalanche of monetary tightening, some expected, some not. That’s not so easy to just brush off, particularly in the run-up to Jerome Powell’s two-day testimony in Congress.
The “R” word is likely to come up a lot later Wednesday and the Fed Chairman will have a tough time dodging it, especially with mid-terms in five months. Naturally, he’ll do his best to remain apolitical, but I’m not sure investors will be able to ignore so much recession chat.
BoE encouraged by inflation data
The UK public can’t ignore the reality of recession, either.
A summer of discontent is coming as the cost-of-living crisis rears its head in the form of strike action. Day two of travel disruption begins Thursday amid more failed negotiations earlier this week. With Brexit now behind us (ish) and mask mandates a thing of the past, it’s only natural that we Brits have found the next thing to argue about this summer. How exciting.
Inflation is, unfortunately, a very real and significant problem though, as evidenced by the May CPI data Wednesday morning. The BoE may be slightly encouraged by the core reading which fell a little faster than expected.
Energy and food continue to drive the headline reading, which the central bank can’t ignore, but the new data may encourage it to continue on the gradual tightening path against expectations of super-sized hikes.
Recession priced into oil markets?
Is oil prices getting whacked the clearest sign of recession fears spreading across financial markets? With equity markets, it’s been a death by a thousand cuts, as inflation panic has morphed into tightening and growth fears and finally, the reality of a recession.
Oil market dynamics mean crude has rallied throughout this as demand has been strong and supply insufficient. Is all of that about to change?
There’s been a clear shift over the last week and as far as I’m aware, there hasn’t been a miraculous oil discovery that solves all of the supply issues. But there’s been a far greater acceptance that a recession may be unavoidable if central banks are going to get control of inflation again.
WTI is falling rapidly back towards $100 where it could see strong support.
Gold the outlier
It seems everything is making moves at the moment, everything except gold, that is.
The yellow metal is trading around a very familiar level – $1,840 – and showing little indication of deviating from here in any significant way. Perhaps Powell can spur it back to life. If not, the $1,800-1,870 range remains intact, as it has broadly been speaking for the last six weeks.
Cryptos’ dotcom moment
Bitcoin is clinging onto $20,000 for dear life, the fear being that a loss below could again see it spiral out of control.
The market environment remains very unfavourable, as have the headlines of late. I don’t expect either to improve, which could make life very uncomfortable in the short term.
One interesting story that has grabbed my attention is BoE Deputy Governor Jon Cunliffe suggesting that this could be cryptos’ dotcom crash. The sink or swim moment which unearths the Amazon and eBays of the crypto space and rids it of the many that only exist to be the get-rich-quick vehicles many pray they will be.
Crumbling prices aside, this could be a big moment for cryptocurrencies.
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.