By Craig Erlam
Stock markets were bouncing back on Tuesday following a rocky couple of weeks as investors grew nervous about the economic impact of tightening.
Fed Chair Jerome Powell could not have been more clear at Jackson Hole on Friday on the central bank’s tightening stance and unlike the warnings from his colleagues, the message appeared to have finally gotten through.
Which makes Tuesday’s move all the more curious. It’s not that we’re seeing a rebound as equity markets don’t move in straight lines, rather it’s the strength of it that is interesting.
Prior to Friday’s speech, investors appeared determined to cast aside warnings in favour of the dovish pivot narrative and Tuesday’s moves may suggest the same could still be true after a brief pullback.
With a 75 basis point rate hike now viewed as the more likely outcome from the Federal Reserve in a few weeks and ECB officials putting a similar move on the table ahead of its meeting next week, how strong of a recovery can we really expect in equity markets?
Central banks have made it perfectly clear that the fight against inflation is their primary concern and a hard landing may just be the price to pay. While that may change if we see any significant improvement on the inflation front over the coming months, the risk still appears more tilted to the downside for the economy.
Saudi Arabia reinforces support
Oil prices are easing a little with Brent potentially settling around $100 and WTI a little below, at $95. While there remain many moving parts in the oil market, the comments last week from Saudi Arabia have reinforced support below the current price.
It seems OPEC+ isn’t interested in the oil price slipping much below $100 a barrel and while those warnings would be put to the test in the event of a nuclear deal with Iran, which still looks very challenging, or a global recession, the words alone could keep prices high for now.
Gold fails to bounce back
Gold continues to struggle in the aftermath of Powell’s comments on Friday, even though the dollar was falling on Tuesday and US yields are a little lower. The yellow metal continues to test $1,730; a sign that not all are on board with the recovery trade we’re seeing elsewhere.
A significant break at $1,730 would be a real blow for gold, with the next area of notable support falling around $1,680-$1,700.
A move back above $1,765 could get gold bulls excited once more, but that may be easier said than done if trading over the last few sessions is anything to go by.
Big moment for bitcoin
Bitcoin enjoyed a slight recovery Tuesday after surviving a brief dip below $20,000 over the weekend.
The hawkish sentiment by Powell took its toll at the end of the week, but crypto bulls are fighting back to defend what could be a key level. We may need to see more of the resilience displayed in recent months, as a failure to do so could quickly see bitcoin retesting the June lows.
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.
