By Craig Erlam
Equity markets are a little softer on Tuesday as investors await more earnings from the U.S. and closely monitor events in Davos.
Stocks have had a strong start to the year on the belief that interest rates may not go as high as feared and even move into reverse later in the year. While that is looking plausible in the U.S., it may not be the case in Europe where policymakers are seemingly still some way from considering the tightening cycle complete.
The ECB, for example, was very late to the party and could be at least three 50 basis point hikes away from the terminal rate which we could see around the middle of the year.
Inflation in the euro area declined last month, but core inflation is still on the rise which is why we’re continuing to see pushback to the idea of slower hikes and cuts this year. That narrative may change once the data moves in a more positive direction.
Pressure on BoE
In the UK, data remains quite troubling.
Labour market figures released Tuesday showed earnings growth accelerating to 6.4%, meaning while we’re still seeing negative changes in real terms, as far as the central bank will be concerned, they’re still far too high to be consistent with inflation returning to target.
And the longer it goes on, the more stubborn inflation will become. That should ensure the BoE continues tightening by 50 basis points next month, at which point we’ll get fresh economic projections.
Encouraging figures from China
The data from China overnight was broadly positive, even if it confirmed one of the slowest annual growth rates in decades. The economy ended on a stronger note despite the surge in Covid infections, as the leadership suddenly pivoted from a zero-tolerance approach to allowing it to run free.
That was expected to take a heavy toll on the economy, initially, but the figures for December from retail sales to industrial production and fixed asset investment suggest a much more modest hit.
That may offer hope that the opening months of the new year will not be as bad as initially feared.
Buoyed by China data
Oil prices are a little higher Tuesday after paring gains at the start of the week to remain near the highs of the last month, or so.
Brent crude has mostly traded between $76 and $86 since early December, but the mood appears to have become a little bit more bullish thanks to some promising economic data.
The prospect of a soft landing in the U.S. and a shallower economic hit in China from the Covid transition, not to mention a strong rebound, has driven the latest rebound in crude prices and the narrative on both of these doesn’t appear to be shifting. The China data overnight was a real positive, enabling Brent to reverse Monday’s declines.
Now it’s over to Davos and earnings season to get a look at how policymakers and business leaders perceive the latest developments, and whether companies are planning for tough conditions ahead.
Gold is paring gains for a second day as the dollar rebounds slightly and yields creep higher. Perhaps we’re just seeing some broader market profit-taking ahead of what could be another eventful week.
Gold briefly surpassed the upper end of what in recent years has been a tough trading zone between $1,880 and $1,920. That may be contributing to some profit-taking, with the next major test being $2,000, where gold briefly traded above last March.
Bitcoin bouncing back
Bitcoin seems to have been one of the big winners from the new year risk rally, after struggling for much support in recent months as a result of the FTX collapse.
Perhaps it’s making up for lost time as traders look to capitalise on such heavily discounted levels compared with the 2021 peak.
That said, it will take a lot more than a risk revival to get traders fully back on board.
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.