By Craig Erlam
Not the most eventful start to the week, but that’s unlikely to last with earnings being a particular focus in the coming days.
This is likely to be one of the busier earnings weeks, with some major names scheduled to report.
It hasn’t been a great start and disappointing results last week, particularly in financials, took the wind out of the sails of the new year rally. There’s a more downbeat tone to earnings season now, with a particular focus on layoff announcements.
There’s been a significant reluctance by firms to let staff go after the struggles of the last couple of years in re-hiring those released during the pandemic. But the number of firms doing so is rising and it’s not just contained to the tech sector, which in itself has let staff go in the tens of thousands.
As the number of firms releasing staff grows, so does the risk of those that were reluctant becoming less so, and before you know it, it becomes something of a doom loop.
Perhaps that’s extreme, but there is a risk that a growing and more widespread list of firms take similar measures and the unemployment rate, after staying stubbornly low for so long, pops higher quite suddenly and sharply.
For this reason, central banks need to tread carefully now as economies have had to quickly absorb a large number of interest rate hikes and the potential for unintended consequences has risen. I expect that will be the case with most drawing the tightening cycle to a close in the current quarter.
Difficult decisions for BoJ
The Bank of Japan is one of the outliers in all of this, with policymakers clearly of the view that no tightening cycle is warranted.
There is a growing debate around this and the minutes from the December meeting highlighted to some degree the extent to which the conversation has become more troubling.
I don’t expect that will get any easier now that they’ve begun tweaking the yield curve control tool – the beginning of the end in all likelihood – inflation has risen, wages are expected to follow and a new Governor will soon be in place.
Oil higher on China reopening
Oil prices are a little higher at the start of the week, continuing to trade around the peaks from earlier this month and late December. The Chinese reopening on the back of much more relaxed Covid curbs has boosted demand expectations, lifting the price of crude in the process.
While the reopening itself will no doubt prove to be complicated, particularly over the holiday season, early indications suggest there has been a rise in activity, meaning the economy could perform better during the transition, as well as the recovery. That could see Brent move back into the $90-100 range as the oil market tightens.
Gold rally stalling
Gold is trading a little higher on Monday, but the new year rally appears to have stalled, with momentum indicators trending lower.
This happened towards the back end of the last year as well, but rather than triggering a correction, a shift in broader market sentiment saw momentum pick up once more and gold rally, which could easily happen again.
If not, we could see a correction building, with gold now almost 20% off its November lows and a little over 6% from all-time highs.
Choppy but BTC holding gains
It’s been a fantastic start to the year for bitcoin after a woeful 2022, which traders will have been delighted to see the back of.
It’s been a choppy few days, with bitcoin trading between $22,300 and $23,300. That’s a range many would have only dreamed about a few weeks ago and it will be interesting to see what that does for interest after such a turbulent period.
Will traders be keen to get back in or are they still fearful of more negative headlines ahead? Early signs are promising but then, this is crypto and volatility comes with the territory.
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.