By Craig Erlam
Stock markets turned red again on Friday after spending the earlier part of the week in recovery mode, with yields around the world once again on the rise.
The recovery never looked sustainable and that’s how it’s proving to be. There is still huge uncertainty over the economy, inflation and where interest rates will end up, and none of that is conducive to a strong sustainable stock market recovery.
The situation in the UK looks particularly bleak and that’s before you consider the fact that the Conservative party is looking to elect a new leader less than two months after appointing the last.
I’m not sure anyone is particularly confident that we’re suddenly going to see stability in government. The fact that Boris Johnson could make a spectacular return to Number 10 pretty much sums up how messed up the situation is.
Investors appear to share that pessimism as is evident in the performance of the pound which was down 1% against the dollar again on Friday. That’s naturally not been helped by another dreadful retail sales report, with volumes dropping 1.4% last month after a decline of 1.7% the month before.
That further supports the view that the economy is probably already in recession and those pressures will only intensify in the coming months as the Bank of England accelerates its tightening cycle.
Although Ben Broadbent did seek to reassure markets, suggesting they were pricing too aggressively which led to expectations being pared back a little.
Yen slides further
The Bank of Japan was active again as it sought to stop the yield on the 10-year JGB from breaking above its 0.25% upper band. This was the second day it conducted unscheduled purchases in response to market pressures, piling further misery on the yen which has smashed through 150 against the dollar.
There’s still no intervention, though, from the Ministry of Finance despite more warnings overnight.
It seems the urgency with which they’re monitoring the situation isn’t in fact that urgent at all. Although considering how ineffective the last intervention was, they may be wondering what exactly the correct policy response is.
Sitting and waiting for the dollar to fall isn’t working either though. And it seems the BoJ is in no mood to tweak its yield curve control targets, despite inflation remaining at 3% and core rising to 1.8%.
Another choppy session in oil markets but one in which the price was once again broadly unchanged on the day. Thursday saw a decent rally before gains were erased and on Friday we saw the opposite.
It continues to look like oil is establishing a new range after a host of factors caused massive swings in the price including the increasingly pessimistic global economic outlook and the huge 2 million barrel cut to output from OPEC+.
We could see Brent stabilise between $90 and $100, barring another coordinated SPR release.
Gold recovery rally short-lived
Gold prices slipped a little again after a recovery rally on Thursday was cut short.
The bullish case for the yellow metal remains weak considering the uncertain outlook for inflation and interest rates. It tested support around $1,620 early on Friday with further support potentially coming around $1,600.
Bitcoin slips amid risk aversion
Bitcoin is also in the red at the end of the week, tracking moves in other risk assets.
BTC is off around 1.5% compared with losses of more than 2% in Europe and more than 1% in US futures. Still, it slipped below $19,000 on Friday morning although that does little to change the outlook.
It’s fluctuated around $20,000 for the last couple of months and Friday’s trend doesn’t really change that.
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.