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Finally hitting home

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By Craig Erlam  

Equity markets are ending the week in the red after finally falling victim to the persistent disappointment of US economic data on Thursday.

It’s taken a lot, but it would appear investors’ eternal optimism is being shaken, with the latest PPI figures driving the message home that bringing the economy in for a soft landing will be challenging and there’ll likely be plenty of turbulence along the way.

In reality, the message should have sunk in much sooner, but investors were seemingly so convinced that these were just blips in the data that they failed to see how quickly they were stacking up.

Don’t get me wrong, I’m still of the view that the data will improve again, but I’m not so willing to turn a blind eye to what it’s telling us now. And most importantly, neither is the Fed which has been less willing to get carried away with what came before.

Suddenly, the topic of conversation has changed from one more 25 basis point hike and then two cuts later in the year, a few weeks back, to perhaps reverting back to 50bp in March and hiking by another 75bp in total.

It was always going to be a rollercoaster ride this quarter and maybe next, and the first seven weeks of the year have been just that.

Oil slides, remains in range

We continue to see oil prices fluctuate, although recent choppiness has occurred largely near the upper end of their range since early December. Brent and WTI are on the decline on Friday, matching overall risk appetite in the markets, but broadly speaking, little has changed.

One major upside risk to prices remains China and its recovery from the transition to living with Covid.

Russian output remains another, following reports that its output will fall by half a million barrels per day from March, as a result of the price cap. Some suggest that could double later in the year.

There are downside risks, of course, not least a slower global economy as a result of much higher interest rates. But for now, traders seem content with it remaining in the range.

Warm weather has enabled gas prices to continue drifting lower, albeit at a slower pace after falling back to pre-war levels. European gas stores remain strong as a result, although that could shrink over the remainder of the winter.

Another setback for gold

Thursday’s PPI numbers were the latest setback for gold, coming on the back of the red-hot jobs report, stubborn CPI data, and strong retail sales. Gold has fallen around 7% over the last couple of weeks and it appeared to be stabilising around $1,820-1,830 on Thursday.

It’s trending lower once more on Friday, off almost 1%, but there isn’t an enormous amount of momentum at this point. We could see it consolidate around here or even pare losses, although a break of $1,820 could see the sell-off intensify again with $1,780-1,800 being the next major test.

Bitcoin taking off?

Bitcoin is in retreat at the end of the week, not immune it seems to the sharp shift in risk appetite throughout the markets. That comes after an immense rally earlier this week that saw it hit an eight-month high on Thursday.

While the risk element will no doubt be a key factor, that the correction is occurring in the $24,500-25,500 zone suggests that there’s a coincidental element to it as well, as we could have expected to see some profit-taking around these levels regardless. The risk mood may have just helped that along.

Regardless, bitcoin bulls will no doubt be excited by recent developments in the price and may feel more optimistic than they have since 2021.

 

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.