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Playing the Grinch

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By Craig Erlam

Stock markets are going into the festive period in a downbeat mood, as central banks this week reaffirmed their commitment to raising rates.

The prospect of a Santa rally is fading as we near the end of 2022, very much in keeping with how the rest of the year has unfolded.

Going into December, there was growing optimism that policymakers could be a source of optimism going into the new year, but instead, they’ve taken on the role of grinch, bringing a swift end to the celebrations.

Considering the eagerness of investors to embrace the imminent end of the tightening cycle, you can understand the positions being adopted by central banks. The faintest hint at pausing the hiking cycle now will likely see financial conditions loosen, undermining their efforts to get a grip of inflation again.

I expect the data will allow a change of heart early in the new year and central banks won’t necessarily fully follow through on what they’re signaling to the markets now.

Of course, considering the numerous surprises this year, I don’t say that with enormous conviction. Expect the unexpected may well remain the mantra next year.

Can WTI break $70?

Oil prices are slipping once more in volatile trade. There are so many driving forces in the oil market at the moment and a more sombre economic outlook on the back of the hawkish central bank message this week appears to be the dominant one going into the weekend.

The interesting thing remains how prices respond to the December lows, should they be tested again, with the level in WTI also representing the point at which the White House has indicated it will start refilling the SPR.

We’ll see how much of a floor that puts in the price, but in the short term it could at least offer some support.

Correction on the cards?

It hasn’t been the best week for gold, which appeared to be on the brink of a very bullish breakout following the US inflation data on Tuesday. The Fed appeared to put an end to those hopes in the near term and a wave of risk-aversion towards the back end of the week boosted the dollar and yields, further weighing on the yellow metal.

With momentum already waning in the run-up to this week’s events, we could be looking at some exhaustion combined with the hawkish commentary to drive a correction.

It’s seen some support around $1,770-1,780 over the last day or so, with the next key level falling around $1,760 and then $1,730.

I get up, but I get knocked down again

Bitcoin’s revival was short-lived and it now finds itself back around $17,000.

It was always going to be difficult to build on the early week gains in any considerable way and the wave of risk-aversion in the markets was enough to knock it down once more.

It’s going to take some favourable headlines and significantly improved risk appetite in the markets to lift it back toward $20,000 in the near term.

 

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.