By Craig Erlam
Stock markets aren’t faring too badly on Thursday, which is surprising considering how eventful the last 24 hours have been.
While the Fed’s hawkish rate hike is probably the dominant driver in the broader markets, the dangerous nuclear threats from the Kremlin are causing quite a stir and then there’s the small matter of Japan’s first FX intervention in 24 years which triggered huge moves in the yen.
Fed resists urge
The Fed’s decision to hike by 75 basis points, despite the obvious temptation to opt for a full percentage point, was probably sensible given the scale of tightening we’ve already seen this year.
It now expects to go further with rates, with markets pricing in another 125bp this year and 25 next, although as we’ve seen throughout the year, that will probably change as we get more data.
In much the same way that investors got too excited by the July inflation data, it may prove to be the case that the August setback isn’t as bad as feared. In such uncertain times, overreaction is becoming the norm.
Japan finally intervenes
The Bank of Japan is standing firm on its policy stance, despite the widening differential with the US and others. That has put considerable pressure on the currency this year, so much so that the Ministry of Finance completed its first intervention in 24 years as the yen neared 146 against the dollar.
Interestingly, the level the pair reached was only a little shy of the one in 1998 when it last intervened, prompting further speculation about whether this is the unofficial line in the sand.
That has been denied, but the rate check also occurred around 145, so perhaps there is more to it than just volatility. It will be interesting to see how keen traders are to put that to the test.
BoE on conservative path
The Bank of England raised rates by 50 basis points on Thursday, a move some view as a little conservative under the circumstances.
Of course, that’s an accusation that’s been levelled against the MPC a lot this year as it proceeded with 25bp hikes while others were accelerating them. But without the benefit of new economic projections and details of Friday’s mini-budget, the decision is that much harder as was evident from the vote split.
Perhaps the BoE will regret passing up another opportunity to ramp up the pace of tightening, with inflation now seen peaking just below 11% in October and remaining in double-digits for a few months after.
But with the economy potentially already in recession, the Bank – like many others – finds itself between a rock and a hard place.
CBRT keeps cutting
One central bank that isn’t concerned about the consequences of its actions is the CBRT. It cut rates by another 100 basis points on Thursday despite Turkey’s soaring inflation sitting above 80% which sent the lira to a new record low against the dollar.
You have to wonder what it will take for the central bank to accept that its experiment – at the worst possible time – has failed, but clearly, we’re not nearly at that point.
More pain to come, it seems.
Franc slides
The Swiss National Bank hiked rates by 75bp Thursday which was at the lower end of expectations.
The franc tumbled in the aftermath of the decision, slipping more than 1.5% against the dollar, euro and pound. That’s despite Chair Thomas Jordan hinting at more to come including potentially at an unscheduled meeting, should conditions warrant such action.
He also suggested that FX interventions could take place as necessary – which is a hot topic – while also stressing that the stronger franc has aided the fight against inflation.
Oil rises
Oil prices were rising again on Thursday after giving up initial gains a day earlier.
Nuclear threats are increasingly becoming the norm from the Kremlin, but energy prices remain very sensitive.
Still, crude isn’t trading too far from the six-month lows and another round of aggressive tightening around the world won’t be helping, as economic fears continue to weigh on demand prospects.
A move below those lows – around $86-88 in Brent – could signal much gloomier economic forecasts and frustrate OPEC+ which has stated it could announce further output cuts, even before the next scheduled meeting.
Choppy trading in gold
Gold has been quite choppy since breaking below $1,680 last week. It has fluctuated largely between here and $1,650 and briefly moved above in the aftermath of the Fed decision.
Even on Thursday, it slipped back towards the lower end of that range, but has since recovered as the dollar erased gains. Perhaps that’s a sign of a floor appearing, with the market now having priced in a large amount of tightening.
The break of $1,680 appeared very significant, but time will tell. A pull back in the dollar could facilitate such a recovery in gold.
Bitcoin seeing strong support
Bitcoin is managing small gains after slipping earlier in the day. Once more, it slipped back towards $18,000 where it ran into some support.
With the summer lows around $17,500 just a little below again, this is a huge test for bitcoin and cryptos overall. If risk appetite doesn’t improve, that support is at risk of breaking, with further support then potentially appearing around $16,000.
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.
