By Craig Erlam
European stock markets are poised for another weak open as much of Asia reopened on Tuesday to large declines.
Asia is flashing red as it nears the close and Europe may be facing a similarly bleak day.
JP Morgan CEO Jamie Dimon didn’t hold back in his assessment of the economic outlook, adding to the warnings of the IMF and World Bank, among others. Dimon was one of the first earlier this year to warn of far more aggressive monetary tightening and even he proved to be ultra-conservative, even if it didn’t look that way at the time.
There is growing pessimism in the markets and with some big data points to come from the US this week, not to mention the start of earnings season with JP Morgan among those getting us underway, investors should brace for more volatility ahead.
Tight UK labour market making BoE job harder
The UK labour market is showing little sign of loosening, with unemployment in the three months to August falling to 3.5%. At the same time, average earnings including bonuses jumped to 6%, while excluding bonuses they rose to 5.4%.
That’s another sizeable increase but perhaps not surprising when firms are facing labour shortages, according to a report from CBI and Pertemps. At the same time, with inflation running at close to 10% and expected to increase further, real UK incomes remain extremely negative.
One lesson from the pandemic was that companies shouldn’t be in such a rush to let workers go as hiring them back can be difficult and expensive. While that knowledge, alongside higher wages, may help households navigate the cost-of-living crisis and impending recession, it makes the job of reining in inflation that much harder for the Bank of England.
How hard that will prove to be will depend on the Chancellor’s budget in three weeks. Markets expect at least 1% of rate hikes in November, maybe more, but that may well change over the coming weeks.
The pound tumbled again after the data and is threatening to break back below 1.10 against the dollar, a move that will no doubt fuel parity debate once more.
Oil eases amid more recession warnings
Oil prices are paring recent gains for the second day as the IMF and World Bank warn of an increased risk of a global recession. Those warnings won’t come as an enormous surprise given the immense economic headwinds as a result of the pandemic and Russia’s invasion of Ukraine, not to mention the baffling decision by OPEC+ last week to cut output by 2 million barrels per day which will only add to them.
Oil prices rose around 20% from their September lows as a result of the output decision and may not be done yet. Prices are now back around levels the alliance appears to be targeting, despite forever claiming that balancing the market is what they’re interested in.
The level everyone is focused on now is $100 which Brent has struggled to overcome since early July. Perhaps with OPEC+ squeezing supply, it will have more luck this time.
Gold crumbles after unsustainable recovery
The rally in gold always looked like it was going to be difficult to sustain in an environment of higher government bond yields and a dominant dollar. And it has well and truly wilted over the last week, initially easing off its highs before totally giving up as it collapsed through $1,700 before stabilising a little on Tuesday around $1,660.
A 4% decline in less than a week and it’s hard to see it turning things around without a big helping hand from the US inflation data on Thursday. The Fed minutes will be of interest but to a large extent are outdated at this point.
Even the CPI release may come too late as the Federal Reserve has made it clear that one good reading won’t be enough to change course. We’ll see whether traders agree over the coming days, but early signs aren’t promising.
Key levels below include $1,640 and $1,620, with $1,600 the one to watch. If it manages a recovery, then $1,685-1,690 looks interesting, as it’s a level it has repeatedly rotated around in recent months.
No one panicking just yet
The risk-aversion of recent days hasn’t been ideal for bitcoin either, with the cryptocurrency slipping back below $20,000 and struggling to turn its fortunes around. It’s off more than 1% again Tuesday morning around $19,000, having spent much of the last six days in the red.
Of course, we’ve become accustomed to these fluctuations and the recent sell-off has been modest in pace. No major technical supports have been broken at this stage, so I can’t imagine anyone is panicking. Of course, we’ll see if the same is true after Thursday.
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.