By Craig Erlam
A mixed session in Asia overnight after Wall Street rebounded on Wednesday, while Europe opened a little higher as well.
Frankly, it’s been an awful few weeks for stock markets so Wednesday’s gains will come as a mild relief, albeit one not to get particularly excited about. Given the economic backdrop, this could be nothing more than a dead cat bounce. Of course, there may be more potential next week, if the US delivers a favourable inflation report.
With the BoC and RBA both signalling a desire to ease off the brake in the months ahead, the Federal Reserve could be next if inflation allows, at which point we could see investors become a little more optimistic as they assess the damage.
Perhaps the anticipation of another encouraging inflation report is what’s already tempting investors back in.
More bold action needed from ECB
Of course, not all central banks are at the dovish pivot stage yet, in fact, the ECB is only just getting started. Thursday’s rate hike is only the second of the cycle and will take the deposit rate above zero for the first time in a decade.
There’s a long way to go to get inflation in check which makes a 75 basis point hike all the more reasonable.
This is the problem with starting the process so late and learning nothing from the experience of other central banks. The ECB is forced to play catch up quickly and the economy could suffer the consequences.
A recession looms for the euro area and the central bank is not going to make the process any easier.
Asia appears to have missed out on the midweek rebound and China’s zero-Covid strategy may be to blame. The country announced an extension of the lockdown in Chengdu which exacerbated fears of an economic slowdown as it continues to push back against the yuan decline, support the property market and boost domestic demand.
Clearly, the impact of its Covid stance stretches beyond its own borders and it appears to be taking a toll on regional markets.
OPEC+ will be watching closely
Oil prices are rebounding slightly on Thursday, up almost 1%, after collapsing more than 5% a day earlier on renewed global growth concerns. With policymakers around the world still hawkish on interest rates, most notably in the US, and China locking down major cities in its zero-tolerance fight against Covid, the demand outlook is weakening.
After such a long period of supply driving the crude price, it’s demand that appears to be dominating now with traders anticipating a slowdown, maybe even a recession next year.
I can only imagine how OPEC+ is taking the recent price moves, with its warnings and token cut seemingly falling on deaf ears. An emergency meeting may well be on the cards ahead of its scheduled October gathering.
Gold enjoyed a little reprieve on Wednesday, as yields pared recent gains and the dollar pulled off its highs. I’m not sure we should get too excited about gold’s resurgence just yet, in fact, it’s already slipping a little on Thursday.
The rebound means crucial $1,680 support continues to hold for now, but given the backdrop of hawkish central banks and immense uncertainty in the markets, I’m not sure traders are ready to abandon the dollar just yet.
That said, it will be interesting if gold can catapult itself back above $1,730 as that would suggest – in the short term at least – it has found some favour in the markets.
With a double bottom perhaps forming in gold, a break of $1,730 could indicate a significant corrective move, even if the longer-term trend is still very much against it.
BTC sell-off momentum fading?
Bitcoin recovered a little on Wednesday after slipping to around $18,500 – its lowest in almost three months – as broader markets pared recent moves.
It’s lower again on Thursday and appears to have quickly run into resistance around $19,500 where it had seen strong support in late August and early September.
It’s not looking great for crypto, with bulls hoping sentiment in the broader markets can sustain some of Wednesday’s lift. One thing worth noting is that momentum in the decline appears to be fading which could suggest we’re seeing some profit taking on approach to the June lows, which may support the price in the short-term.
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.