Risk back on?

Stock markets remain in positive territory on Wednesday after a reassuring appearance from the Chairman of the Federal Reserve and some inflation data.

Jerome Powell put in a decent performance on Tuesday but sentiment is clearly very fragile and it may not take much to tip investors over the edge again. Three rate hikes are now heavily priced into the markets this year, with balance sheet reduction perhaps starting in the third quarter.

While investors could get on board with that, the situation is clearly extremely fluid. Expectations have changed considerably in recent months and while a few rate hikes and some balance sheet reduction may be preferential to prolonged, uncontrolled inflation, there is a limit to what investors will tolerate.

In a sign of the times we’re living in, the US inflation data wasn’t too bad. At 7% year on year, the CPI was in line with expectations while the core reading was only marginally ahead at 5.5%. On a monthly basis, the CPI readings were also marginally ahead of expectations, although not to the degree that has caused any alarm.

Rather, it seems the inflation data has been welcomed with investors seemingly fearing much worse. The dollar is slipping after the data, while US yields have eased and US futures are rallying. It would appear relentless optimism is perhaps returning to the markets and dip buyers are diving back in.

This once again brings me back to two key points this week. It’s a strange time of year and one in which we should never read too much into investor doom and gloom. That’s not to say this time may not be different, and there’s certainly cause for concern. But it’s not unusual for investors to suffer the January blues in what otherwise turns out to be a very good year.

And then there’s earnings season which kicks off on Friday. While there is a good reason for caution at the moment, fourth-quarter earnings could offer a timely reminder that there is still plenty to be optimistic about this year. Inflation and interest rates are major headwinds but the economy is strong, the labour market is tight and consumers are in a good position. This may be what investors are clutching on to.

Bitcoin staging a recovery?

Bitcoin is enjoying some mild reprieve over the last couple of days as risk appetite has returned a little in the markets. While some may be hoping the crypto has hit a bottom, after seeing strong support around USD 40,000 earlier this week, there’s little yet to suggest that’s the case. It’s still early days but the rebound hasn’t been particularly forceful. It was lifted by the US inflation data though, which has boosted risk appetite more broadly. Whether that will be enough is another thing.

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
Craig Erlam

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