By Craig Erlam
The week is off to an eventful start with the UK government announcing its first U-turn, speculation mounting ahead of the OPEC+ meeting and Japan warning of another possible FX intervention.
Equity markets were flashing red once again on Monday as investors continue to fret over the outlook for the global economy. There remains considerable uncertainty over where the peak is for inflation and interest rates and how quickly they will fall thereafter. While that remains the case, investors are going to be on edge.
The PMI figures Monday morning largely confirmed what we already learned from the flash reading, that the manufacturing sector is contracting at a worrying pace and in many cases accelerating. The UK, Germany, France, Spain and Italy are all in contraction territory – below 50 – and significantly so at that.
UK U-turn only the first step
Which is no doubt one of the reasons why the UK government is keen on its growth strategy. But as is often the case, it’s not just what you want to implement that matters, it’s when you want to do it and how you’re going to pay for it. Something the government still doesn’t seem to grasp.
The decision to U-turn on cutting the 45% rate of tax came amid mounting pressure from within the Conservative party after more than a week of backlash in the markets and the broader public.
While welcome, it alone won’t ease market concerns as it only represents a small portion of the unfunded tax cuts that were needlessly announced before next month’s budget and OBR forecasts.
The government has a long way to go to restore trust and confidence.
Awaiting further intervention
Japanese officials warned of further FX interventions again after the dollar rose back above 145 against the yen. It was around these levels that the Bank of Japan first conducted a rate check a number of weeks ago before recently intervening for the first time in 24 years.
So, it’s understandable the intervention speculation is rife once more. And on Monday morning it was the Finance Minister who warned they’re ready to take “decisive” action.
Officials were previously keen to state that there is no specific line in the sand – as far as intervention is concerned – as we’ve seen (occasionally disastrously) with others in the past.
But with interventions and checks previously occurring in this region, another may soon be conducted. And how effective will it be?
The 2.8 trillion yen intervention almost two weeks ago was forceful but clearly not lasting. Sustainable improvements may only be possible with tweaks to the BoJ monetary policy stance and with one official claiming corporate inflation expectations in five years hit 2%, we may be slowly inching towards that.
How much will OPEC+ cut by?
Markets have been awash with OPEC+ speculation, with reports suggesting the group will consider an output cut in excess of one million barrels per day and that Saudi Arabia could unilaterally add to that.
After a year of tolerating extremely high prices, missed targets and severely tight markets, the alliance seemingly has no hesitation when it comes to acting rapidly to support prices amid a deterioration in the economic outlook.
Any cut will no doubt frustrate consuming countries that are on the verge of recession after spending a year dealing with soaring energy costs on the back of the post-pandemic recovery and war in Ukraine.
It’s a fine balancing act and the size of the cut will determine the scale of the backlash. Although as we’ve seen before, that hasn’t really changed the outcome.
Can gold build on recent gains?
Gold prices are inching higher on Monday, up around half a percentage point, as US yields soften a little.
I’m not sure gold bulls will be getting overly excited by this move, especially ahead of Friday’s jobs report which could cause another stir. But the yellow metal continues its gradual rise towards the $1,680-1,700 region where it could face plenty of resistance.
Should we see signs of peak inflation and interest rate expectations in the weeks ahead, gold could find itself back in favour, but given recent experience, that may be a lot to expect and traders could initially proceed with caution.
In a holding period?
Bitcoin was off around 1% on Monday, but largely remains where it has been trading for the last month, barring a couple of brief spikes.
The cryptocurrency may have formed a base for now which could be an encouraging sign barring another big wave of risk aversion in the markets. Although it has shown some resilience to these.
Perhaps we’ve just entered a holding period; the hope being that the storm passes without further serious damage.
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.
