Early gains fizzle out

It’s been an interesting start to the week as equity markets made strong gains early in the day before giving most back as the morning wore on.
US futures had a similar experience and are now treading water ahead of the open on Wall Street. What’s interesting about the moves is how happy investors are to turn a blind eye to a growing list of risks for the economy and markets.
In the space of a week, Evergrande has gone from being viewed as a potential Chinese Lehman moment to seemingly being nothing to be concerned about. In that time, one deal was reached with onshore bondholders, while an USD 83.5 million offshore coupon payment was missed without explanation and another USD 45 million is due to be paid this week.
Policymakers are continuing to grapple with rising inflation which is both higher and potentially less transitory than previously anticipated. An energy crisis isn’t likely to ease those concerns, with households and businesses facing higher bills and input costs, which could exacerbate the issue further and make life very uncomfortable for central banks.
ECB hosts central bank forum
Thankfully, we’ll hear the views of many policymakers from a number of central banks this week who will no doubt be keen to reassure investors. ECB President Christine Lagarde got the week underway and stated that the view remains that the inflation upswing is “largely transitory” and while there are some factors that could lead to stronger price pressures, the baseline scenario remains that it will remain below target over the medium term.
Fed policymakers Lael Brainard, John Williams and Neel Kashkari are all due to speak today. All err more on the dovish side typically so it will be interesting to hear their views on the recent trends and whether they support the plan to taper this year.
Charles Evans has already aired his views today and they seemingly align with what the central bank put out last week, that conditions will soon be met for tapering. Interestingly though, he claimed that he’s more uneasy about not generating enough inflation in 2023 and 2024 than living with too much now. Fed policy makers will be busy this week so there’ll be no shortage of views to get stuck into.
The SPD narrowly won the German election over the weekend and will now seek to form a coalition in the coming weeks and months, with the traffic light coalition the most likely at this point. It was clear ahead of the weekend that weeks or months of negotiations would follow the vote so the impact in the markets has been minimal.
Negotiations between Olaf Scholz and the Greens and Free Democrats will be far from straightforward, particularly the latter, and with CDU head Armin Laschet seemingly not giving up hope of leading an alternative coalition, pressure will be heightened. The hard work begins now and in the interim, Angela Merkel will remain at the wheel.

This article is for general information purposes only. It is not investment advice or a solution to buy or sell securities. Opinions are the authors; not necessarily that of OANDA Corporation or any of its affiliates, subsidiaries, officers or directors. Leveraged trading is high risk and not suitable for all. You could lose all of your deposited funds.

Craig Erlam

Craig Erlam

Senior Market Analyst, UK & EMEA at OANDA
Based in London, Craig Erlam joined OANDA in 2015 as a market analyst. With many years of experience as a financial market analyst and trader, he focuses on both fundamental and technical analysis while producing macroeconomic commentary. His views have been published in the Financial Times, Reuters, The Telegraph and the International Business Times, and he also appears as a regular guest commentator on the BBC, Bloomberg TV, FOX Business and SKY News. Craig holds a full membership to the Society of Technical Analysts and is recognised as a Certified Financial Technician by the International Federation of Technical Analysts.
Craig Erlam
Craig Erlam

Latest posts by Craig Erlam (see all)