By Craig Erlam, Senior Market Analyst, UK & EMEA, OANDA
The week is off to a relatively flat start, in keeping with the mood last week in equity markets as investors weigh up a strong earnings season against inflation and interest rate risks.
The market recovery has well and truly stalled in Europe while Asia is still struggling to get much uplift and the US is failing to build on record highs. In many ways, I’m encouraged by the resilience we’re seeing in the markets which are again factoring in higher inflation and earlier rate hikes. But then I wonder what will be the catalyst for the rally to continue.
There’s a long list of reasons to be concerned right now but with earnings season basically in the rearview mirror, the bullish list is looking a little light. Of course, Covid restrictions this winter could be relatively light touch as vaccinations keep hospitalisations and fatalities low which would be a big plus for companies and economies, and support equity markets. But that will only become clear over time.
This may just lead to a lot more two-way price action, deeper pullbacks but highs remaining in sight as investors look to capitalise in anticipation of a strong 2022. Ultimately, it all comes down to the inflation and interest rate risks and it will be months until we have a clearer picture of this.
Investors are seemingly comfortable with modest rate hikes in order to deal with inflation risks but that may change if central banks roll the dice on inflation being transitory and are forced into more aggressive rate hikes next year. It’s a fine balancing act but as we saw recently, central bank inaction when inflation indicators are flashing makes investors very anxious.
Mixed data response from Asia
The week is off to a bumper start on the economic calendar in Asia, although it seems to have received a bit of flat reaction. Retail sales and industrial production in China both exceeded market expectations which should give investors some cause for optimism. On the flips side, fixed asset investment was only 6.1% dragged down by a decline in real estate investment as property sector woes continues to dampen sentiment.
The property sector, which accounts for around a quarter of Chinese GDP, is one major risk for the economy as new home prices continue to fall. But others continue to weigh including strict Covid lockdowns, supply disruptions, higher inflation, electricity outages etc.
In Japan, the recent restrictions weighed heavily on growth in the third quarter which undershot already gloomy forecasts. The country contracted by 3% on an annualised basis but should bounce back quickly as restrictions have been lifted and a large new fiscal package is due to be announced. There wasn’t much of a negative reaction in the markets, although investors have been quite forgiving of restriction-driven impacts, especially if more stimulus is on the cards.
Oil pullback losing momentum
Oil prices are falling again on Monday, although the pullback does appear to be losing momentum as it approaches the lows from a couple of weeks ago. The correction has been partially attributed to the prospect of US President Joe Biden releasing oil from the SPR. While I’m sure Biden will be happy with this result, I’m not convinced it’s a threat he wants to follow through on. Not at these levels. It’s win-win in that sense. For now, at least.
Ultimately prices remain well supported as there’s little chance of OPEC+ raising output faster, especially if – as UAE energy minister Suhail al-Mazrouei claimed today – the group expects the market to return to surplus in the first quarter of 2022. With US shale not the force it was prior to the pandemic as focus shifted to debt and shareholder repayments this year, we may have to get used to prices at these elevated levels.
Is Gold’s winning streak coming to an end?
Gold prices are pulling back a little at the start of the week, threatening to bring an end to the seven-day winning streak for the yellow metal. It’s been quite a run for gold, which has soared as inflation indicators have continued to rise and become more widespread. This, in turn, has forced traders to price in more rate hikes even as central banks push back against it.
Gold has become popular despite higher yields and a stronger dollar, as inflation-adjusted yields remain at their lows. It’s also been seeing some love for its role as an inflation hedge, as we saw in the aftermath of the US CPI data last week. If policymakers continue to stick to the transitory line, gold could continue to see support. Of course, the dot plot next month may be a big giveaway on that front.
Bitcoin edges higher after Taproot upgrade
Bitcoin is a little higher on Monday, not long after the Taproot upgrade was launched which initially had little impact on price. The upgrade, while big for bitcoin, has been a long time coming so was probably heavily priced in. We are seeing some bullish action today but that may have little, if anything, to do with it. We may also just be seeing a rally that’s suffering from a little exhaustion, as we’ve seen on numerous occasions recently.
For a look at all of today’s economic events, check out our economic calendar: www.marketpulse.com/
