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Fed and earnings bring cautious optimism

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By Craig Erlam

A quiet start to what will otherwise be a lively week in financial markets, with particular focus on the US as the Fed meets Wednesday and big tech report earnings.

Stock markets are modestly in the green, with a fair amount of straw clutching at play once more.

Earnings not being as bad as feared, the Federal Reserve only hiking by 75 basis points and China putting together a plan in the hope of averting the next wave of the property crisis, are among the reasons for stock markets rising. It all seems a bit desperate.

We need to take the small wins, but none of the above scream recovery to me.

Stock markets can’t fall forever, but the latest bear-market rally seems to be driven by as much finger crossing as the previous ones. There may be a few more nasty surprises ahead that will test the foundations of the latest market bottom.

Those foundations could be rocked over the next few days, if things don’t go to plan.

I expect the Fed will not hit the panic button yet and hike by 75 basis points again, which still represents a very aggressive tightening path this year. But they may signal that another is possible in September, with markets currently having that as a coin toss.

Whether that will be enough to send equity markets into another spiral I’m not sure.

It could dampen sentiment, but to what extent may depend on what Microsoft, Alphabet and Meta have to say, among others. I’m not sure sentiment can take the combination of disappointing earnings and a more aggressive Fed.

We should all enjoy what is shaping up to be a relatively calm start to the week. The next few days are going to be full on and by the end of the week, we could have a better idea of whether the US is heading towards recession, as appears to be the case here in Europe.

Oil holds below $100

Oil traders have their sights set on many of the same events this week, as they try to better grasp the economic threat facing the US and other countries around the world.

A recession is the primary downside risk for crude prices and it’s all that’s keeping them below $100 in the short term.

A faster path of Fed tightening and disappointing earnings reports from the US this week could trigger further weakness in the oil market, although I am sceptical about the scale of the downside risk.

The tightness of the oil market cannot be ignored, even as recession odds rise. A sustainable break below $90 a barrel still looks like a big ask and if it does materialise, it will be a bit of a double-edged sword.

Gold recovers, faces big test

Gold continues to enjoy a recovery and is set for the third day of gains, as yields remain well off their highs. The US 10-year is not far from three-month lows, with 2.75% looking a potentially important level, as this is where it has repeatedly rebounded higher from in that time.

That will be interesting to gold traders as it could suggest the recovery is already on borrowed time or is about to take off.

We may have to wait for the Fed on Wednesday to see which of the two it’s going to be, with the recessionary implications of its actions key to the outcome.

Bitcoin make or break?

Some may understandably be getting excited by the price action we’re seeing in bitcoin over the last couple of weeks. It’s come from trading below $20,000 to hit a six-week high and now the pullback of recent days has been very mild.

That in the short term is arguably a bullish signal, but it’s still too early to say whether it will have legs.

And as is the case with other assets, the Fed could make or break the recovery.

 

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.