By Craig Erlam
We’re in for another day of risk-off trade, with parts of Asia recording heavy losses and Europe opening on the backfoot.
Fear of tightening-induced recessions has wiped out the recovery we saw in stock markets over the bulk of the summer, as investors were once again burned by an over-eagerness to catch the bottom, despite there being little evidence of it being justified.
That fear has now gripped markets and we may see a little more caution going forward as the Fed has made clear that one inflation reading doesn’t make a trend. It will take a lot more to convince it that it can afford to ease off the brake.
Other central banks may have a lot more work to do; one in particular springs to mind, thanks to the misguided direction the British government is taking the country in.
IMF adds to attacks on UK mini-budget
The negative response to the UK’s “mini-budget” has continued with the IMF adding its voice to the chorus of scathing attacks on the country’s fiscal plans. It appears everyone is unusually united in their objection to the Treasury’s tax-cutting plans at a time when inflation is almost 10% and rising.
The IMF was particularly forthright in its criticism of the debt-funded and untargeted measures, urging the government to re-evaluate during the budget event in November, as current measures simply increased inequality.
Moody’s was equally scathing warning that the measures are a credit negative that could threaten the country’s credibility with investors and more permanently weaken the UK’s debt affordability.
It’s no surprise then to see sterling plummet once more alongside Kwasi Kwarteng and Liz Truss’ credibility on the world stage. Not the best start to life in Downing Street.
BoJ not ready to tighten
The Bank of Japan minutes showed little inclination among board members to change course despite ongoing pressure on the currency and core inflation that is currently above target.
The belief remains that temporary commodity inflation is responsible and therefore not sustainable, although board members did acknowledge that they see price increases broadening, with one even suggesting there’s a stronger chance of sustained inflation backed by higher wages. A small step in the right direction, but a step at least.
Of course, it’s not one that changes the near-term outlook for Japanese monetary policy and so the pressure will remain on the yen as long as the dollar remains king.
Oil rebound brief as gas spikes
Oil prices rebounded on Tuesday, but that proved to be only a brief correction as economic doom and gloom has driven them lower again Wednesday morning.
With Brent trading only a little above $80 a barrel and WTI below, you have to wonder how much more OPEC+ will tolerate and the size of output cut they may be considering next week, in light of the new economic outlook and price.
Gas prices have also been highly volatile in light of the latest developments on Nord Stream One and Two. While the latter was never likely to come online and the former unlikely, as flows have been gradually reduced to zero over the course of the year, the apparent act of sabotage on both kills any hope of additional gas along those routes.
The question for many is what the sabotage sought to achieve, occurring around the inauguration of a pipeline that will deliver Norwegian gas to Poland.
Gold slipping again
Gold is falling again as yields rise and the dollar rallies once more on Wednesday.
The yellow metal has been hammered by the repricing of interest rate expectations recently and is now threatening to break below $1,620, with support next appearing around $1,600.
It’s now fallen more than 20% from its highs this year and could have further to go yet before we see peak inflation and rates priced into the market.
Bitcoin’s show of resilience was short-lived
Bitcoin was showing remarkable resilience at one point on Tuesday, trading more than 5% higher and comfortably outperforming the broader market in a manner that was very impressive.
Unfortunately, it didn’t last long and ended the day in negative territory before slipping another 2% Wednesday morning.
On the one hand, the risk environment is most unfavourable, but we see substantial support around $17,500-18,500. If that can hold, the rebound could be strong.
The question is how long can it hold out if risk assets continue to head lower.
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.