By Craig Erlam
Investors appear to be treading carefully ahead of some key interest rate announcements this week, most notably the Fed on Wednesday and the ECB a day later.
Eurozone inflation data for April didn’t throw up any nasty surprises a couple of days before the central bank makes its decision, rising slightly to 7% as expected, while core stayed stubbornly high at 5.6%.
A 25 basis point rate hike is now heavily backed with one or two more to come over the following months.
RBA may not be done with rate hikes
The RBA surprised markets by hiking the cash rate by 25 basis points to 3.85%.
The move came after the Australian central bank paused its tightening cycle at the previous meeting and inflationary pressures appeared to have eased slightly. That wasn’t enough to put minds at ease though and the RBA warned further hikes may be necessary.
Even with the latest hike, the central bank believes it will take a couple of years to return inflation to its 2-3% target, with low unemployment and the prospect of sustained higher wage and price pressures outweighing the benefits of keeping the cash rate at 3.6%.
The Aussie dollar spiked after the announcement and markets are pricing in a 50% chance of another hike at one of the upcoming meetings.
HSBC shares are up more than 5% on Tuesday after the company announced strong first-quarter earnings – boosted by the purchase of SVB UK – a $2 billion share buyback, and the resumption of quarterly dividends.
The results were driven by higher interest rates which lifted its net interest margin, something the bank is particularly sensitive to.
All things considered, it was a good quarter for HSBC, but with favourable one-off events boosting its profitability, there remains a lot of work to win over some shareholders.
BP reports strong Q1 profits
BP reported bumper profits again in the last quarter, buoyed once more by higher oil and gas prices, albeit to a much lesser extent than we were seeing last year.
Profits overall have come down quite a lot from last year’s peaks, but at £4 billion for the first quarter remain extremely healthy.
While the results will draw more criticism around excess profits on the back of the war in Ukraine and further calls for higher tax rates as households continue to pay sky-high energy bills, the only thing they seem to ensure for now is more share buybacks and higher dividend payments.
Were fears of oil deficit premature?
Oil prices appear to have stabilised in recent days, not far from the middle of the range they traded from early December to March.
The post-OPEC+ gains have been wiped out which suggests traders are now of the belief that the economic outlook has deteriorated to the extent that the output cut won’t create the deficit that was feared when some were calling for $100 crude.
Of course, a lot can change over the coming weeks and months and almost certainly will, but for now, it seems the outlook for oil prices is as it was.
Gold consolidates ahead of FOMC
Gold has gone into consolidation in the run-up to Wednesday’s FOMC decision as traders await the latest views from the central bank in light of recent data and the fallout from the mini-banking crisis.
Markets suggest a 25 basis point hike is locked in and while that could arguably prove to be a mistake, it looks the easiest option at this stage.
What messaging accompanies the rate hike will determine whether we could see a move back above $2,000 and a run at record highs around $2,070.
The Fed must be concerned about the tightening of credit conditions in the aftermath of the collapse of three banks, but it clearly doesn’t want to soften its rhetoric until it has to.
The result could be a sharp, sudden pivot from a policy perspective over the coming months, but as far as Wednesday is concerned, a “wait-and-see” or “meeting-by-meeting” approach may be preferred.
Whether that will be perceived to be dovish enough, we’ll have to wait and see.
Will bitcoin give back its incredible gains?
Bitcoin appeared to be finding some form again late last week, but a more than 6% decline on Monday followed days of it hitting resistance around $30,000.
Whether that will be sufficient to trouble those that were hopeful that a sustained recovery is underway isn’t clear, but a break below $27,000 could spell trouble in the short-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.