By Craig Erlam
Asia has ended the week in negative territory, while Europe and the US may be on course to end their winning streaks amid choppy trade.
August can often be an odd time for the markets, with summer holidays often leading to reduced activity and interest. Of course, these days a quiet week in the markets is hard to come by and this week has certainly not been without drama.
But it has been quite choppy and there is a feeling that investors are waiting for the next big catalyst, something that will change the dynamic in the markets.
We’ve seen a strong recovery in risk assets recently and perhaps we’re seeing signs of exhaustion, which some may argue is long overdue.
The recovery until now has been built on some disinflationary signs, combined with a healthy serving of hope. There remains plenty of scepticism and now the data needs to deliver.
UK retail sales surprise
One place I didn’t expect to see the data deliver was the UK, especially in light of the dismal consumer confidence survey overnight.
According to GfK, confidence hit the lowest level since records began in 1974, falling to -44 in August. That will come as a surprise to no one that either lives in the UK or tracks it, with inflation expected to surpass 13% this year and even that may prove overly optimistic.
Which made the jump in retail sales last month all the more surprising.
That said, once you dive into the data you see that the headline number is a little deceiving. Not only did discounted online sales drive the surprising growth, they more than offset declines elsewhere from clothing to household goods.
Basically, despite the headline number being positive for the first time in three months, the numbers ex-online are a more accurate reflection of the situation right now.
BoJ won’t be swayed
Japanese inflation rose again in June, with the national CPI climbing to 2.6% from 2.4% and the core hitting 2.4% up from 2.2%. Both were in line with expectations and neither point to a change in the stance of monetary policy from the Bank of Japan any time soon.
Inflation continues to be impacted by volatile energy and food prices which the BoJ will likely look beyond. Base effects are also having an impact which should allow the rate to decline again later this year, meaning the central bank will not be inclined to tweak its approach any time soon.
Oil prices stabilising?
Oil prices are paring Thursday’s gains in what is yet another volatile session and week. The list of downside risks has definitely grown lately, with growth certainly top of it.
Iran nuclear talks have not collapsed yet which remains another potential negative for crude prices, given the reported potential for a large amount of crude to come to the market relatively soon.
We may be seeing oil prices stabilising around these levels, with Brent hovering above $92 and WTI choppy around $90. I can’t imagine it will last long, considering how the rest of the year has gone with a conclusion on the JCPOA talks probably having an impact one way or another.
Resurgent dollar weighs on gold
Gold is edging lower again as the dollar continues to see strong support. The resurgence in the greenback has weighed heavily on the yellow metal which was already seeing profit-taking after reaching $1,800.
It has shown some resilience, though, so another run towards here isn’t off the cards. It may just be more difficult if the dollar continues to drive higher and yields don’t ease further.
Bitcoin has gone into a tailspin at the end of the week, dropping very sharply and suddenly early in European trade. It fell more than 5% in a very short period of time and while the trigger isn’t clear, the fact that it has barely recovered any of those losses suggests there is substance to the move.
The break of $22,500 could be significant if it holds, with the next key test once more being $20,000. The crypto winter may not be over yet.
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.