Nerves remain but investors holding firm

We’re seeing modest losses across Europe this morning, while US futures have recovered earlier losses to trade a little flat ahead of the open on Wall Street.

Clearly, there’s plenty of uncertainty in the markets that’s been a drag on sentiment over the last couple of months but equally, investors are not conceding defeat easily. Perhaps their old friend TINA is driving this behaviour, as the fundamentals certainly do not justify such resilience.

While the lack of alternatives is certainly an argument for remaining long equity markets, it’s hardly a healthy reason. And this is after more than a decade of central banks effectively backstopping any sell-offs, which creates the FOMO buy-the-dip siege mentality that now looks relatively reasonable, by comparison.

But as we’ve learned over the last decade or so, no matter how hard it can be to justify the apparently inflated levels in stock markets at times, or how long and severe the list of downside risks become, we never seem too far away from a record high. Will this time be different as central banks withdraw pandemic stimulus measures and raise rates? It should and yet I doubt it.

For one, markets are pricing in some rather aggressive tightening from central banks over the next year or so (or phasing out of stimulus, in some cases) which could quite easily be unwound as economies slow and inflation shows itself to be largely transitory. A year is a long time, especially at a time when everything seems to be evolving so rapidly. It’s not that long ago that policymakers were convinced inflation was entirely transitory.

The next few months are huge in terms of how bad the energy crisis will become, what the knock-on effects will be, how bad another wave of Covid will be and what that will mean for economic recoveries as central banks grapple with inflation risks.

BoE about to make a mistake and raise rates too aggressively?

Which makes the idea of tapering and rate hikes this side of the new year all the more surprising. As we have seen, the pound has been punished as a result of the Bank of England’s apparent determination to raise rates at all costs. A move that is seemingly being deemed a policy mistake by the central bank that will pressure an already shaky recovery.

Or perhaps more worryingly, a sign that the worst is yet to come as the country faces up to the reality of a much greater inflation problem that threatens to weigh heavily on the economy? Either way, the currency has struggled and while it has bounced back this month, it is widely being viewed as a temporary recovery with more pain to come.

On the face of it, the labour market data from the UK today doesn’t look so bad and may support the case for the central bank to tighten monetary policy. But a quick look under the hood shows the numbers are flattered by various factors. The most notable being the furlough scheme which only ended last month and with 1.3 million making use of it, that’s a lot of people that may have since become either unemployed or underemployed.

While the average earnings increase of 7.2% in August also looks very healthy and a potential cause for concern, the number is far more modest when accounting for one-off factors, like a drop in the use of the furlough scheme. With those factors stripped out, the ONS believes the range is 4.1%-5.6%, which while still high is also likely to recede over time as employers face higher costs.

It may explain the additional angst on the committee, though, which will make the data between now and December interesting. Not to mention the monetary policy report in a little over three weeks when the BoE publishes its new forecasts alongside its rate decision. Either way, it will surely hold until at least December to see how the environment evolves in the interim.

Bitcoin eyeing new highs

Bitcoin is steady on Tuesday after making strong gains once again at the start of the week. We have seen it start to lose momentum on approach to USD 60,000 which is the next psychological barrier to the upside. But longer-term, there appears to be plenty of support behind the bitcoin rally which may point to new all-time highs in the not-too-distant future.

For a look at all of today’s economic events, check out our economic calendar: www.marketpulse.com/economic-events/

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