By Edward Moya
This bear market rally was about to run out of steam, but the Bank of Canada had other plans. A Canadian dovish surprise gave risky assets an unexpected boost. This bear market might last a little while longer, but traders can’t forget about what will drive the data-dependent Federal Reserve.
Big-tech earnings are showing a lot; margins and pressures have arrived. Cracks in the economy are here. Tighter financial conditions are not going away.
Meanwhile, inflation and labour stats are not declining fast enough to support a Fed downshift just yet.
The Fed won’t have clear signals that they can downshift tightening until next year, which means the risks of overtightening are still on the table. The soft landing playbook just got thrown out the window and now Wall Street needs to gauge how bad a recession will hit the economy next year.
Financial markets closely watched the Bank of Canada decision that delivered a clear message that they are getting close to being done with tightening.
Wall Street is hoping the Fed will follow the Bank of Canada’s lead in expecting inflation to ease further by year end. The Fed won’t blink next week and the risk of a 75 basis point hike in December should still remain on the table.
BOC
The Bank of Canada has tried to get ahead of the pack when it comes to monetary decisions. They hiked by a full point in July, while others opted for 75bp and now they have downshifted their tightening pace to a half-point rate rise. BOC Governor Tiff Macklem said, “This tightening phase will draw to a close. We are getting closer, but we aren’t there yet.”
The bank’s outlook is not optimistic at all and it seems demand destruction will help bring down inflation. The bank noted that the global outlook is grim and that growth is close to zero.
The Canadian dollar initially tumbled on the smaller-than-expected half-point rate hike, but did pare losses as investors still like the Canadian economic outlook much better than most of the other advanced economies.
Big-Tech disappointment
Both Microsoft and Alphabet earnings results killed what was becoming a not too bad outlook for the economy. Alphabet had a poor earnings report that emphasised a weakening client base, a slump with ad spend, slower hiring, and currency headwinds.
Microsoft saw the worst first quarter revenue growth in five years and had a rather bleak outlook for Azure-cloud sales. Microsoft is noticing softer corporate demand and that theme is becoming the consensus across big-tech.
Another key bearish driver for the tech space was the update from Seagate that included an 7.5% reduction in its workforce.
Oil
Oil is mustering up a nice rally as energy traders try to price in a China recovery that will unfold over the next few months. WTI crude has strong support in the mid-$80s as the oil market still remains tight and now that a short-term peak with the dollar is in place.
Crude prices extended gains after the EIA crude oil inventory report showed exports surged to a record high and gasoline demand bounces back. Crude production is anchored and that probably will remain the case unless the oil giants signal major investments in CAPEX.
The next big move in oil might come from oil earnings later this week that will tell us if we are going to see any investments in new wells.
Gold
Gold is ready to form its pre-Fed trading range. A weaker dollar has been good news for bullion investors, but gains should be capped well ahead of the $1700 level. Treasury yields have been steadily declining and that has helped make non-interest-bearing gold look more attractive.
The Bank of Canada’s dovish surprise was good news for gold as it shows a major economy is already downshifting their tightening pace. Expectations are growing for the Fed to shift to a half-point pace in December and if that seems more likely after next week, gold could have a nice breakout above $1700.
Cryptos
Bitcoin is back above $20,000 as Wall Street grows optimistic that we are about to be done with financial tightening. The dovish surprise from the Bank of Canada is a gamechanger for central bank tightening expectations.
Crypto will struggle with a deteriorating global growth outlook, but extensive pain as a result of the bond market selloff could be ending soon.
Bitcoin is now comfortably above $20,000 and now it will try to stabilise here until the FOMC meeting. If risk appetite remains healthy, Bitcoin could grind higher towards $22,500.
Edward Moya is Senior Market Analyst, The Americas 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.
