Stocks sink as high-level talks disappoint, inflation at highest in 40 years, ECB to end QE sooner, bitcoin falls

US stocks declined after both high-level talks did not produce a stop in fighting and as investors worry that war in Ukraine could lead to higher inflation for much longer.  Today’s inflation report showed widespread pricing pressures before the full impact of the global shock from the Russian invasion of Ukraine.  Energy costs, soft commodities, and metals will continue to see upward pressure and that will start to be sticky as wages soften.

CPI

Inflation was heating up everywhere and this was before Russia invaded Ukraine.  Consumer prices sharply rose in line with expectations, making a fresh 40-year high.  Gasoline, food and apparel prices sent US inflation to a 7.9% annual rate last month, matching the consensus estimate.  Inflation will only get worse over the next few months and that should eventually put the Fed in a position to deliver supersized rate hikes during the summer.

ECB

The ECB is struggling to deliver on its inflation mandate and will let fiscal authorities handle the economic growth shock from the Ukraine crisis.  The ECB is focused on the exit of stimulus and the rolling off of the QE program in the third quarter could be accompanied with an interest rate increase.  The ECB will be nimble going forward, but right now it sees they will end their net asset purchases a lot sooner. To the surprise of no one, inflation forecasts skyrocketed up from 3.2% to 5.1% in 2022, while growth was chopped down from 4.2% to 3.7%.

The euro initially rallied and settled sharply lower after the ECB press conference.  Money markets now expect the ECB to raise rates in September. The dollar remains king but some traders are arguing that the bottom in the euro may have been put in place earlier this week.

Bitcoin slides on risk aversion

Bitcoin is down sharply as risk aversion returned after high-level talks between Russia and Ukraine came up empty.  I may start to sound like a broken record, but bitcoin will not be able to break above the USD 45,000 level until risk appetite is firmly back in place.  Bitcoin needs to see a major de-escalation with the Russia-Ukraine war before investors get a better handle on how aggressive Fed tightening will be and whether inflation has become too sticky and that economic growth will not bounce back as strongly.

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.

Ed Moya

Ed Moya

Senior Market Analyst, The Americas at OANDA
With more than 20 years’ trading experience, Ed Moya is a senior market analyst with OANDA, producing up-to-the-minute intermarket analysis, coverage of geopolitical events, central bank policies and market reaction to corporate news. His particular expertise lies across a wide range of asset classes including FX, commodities, fixed income, stocks and cryptocurrencies. Over the course of his career, Ed has worked with some of the leading forex brokerages, research teams and news departments on Wall Street including Global Forex Trading, FX Solutions and Trading Advantage. Most recently he worked with TradeTheNews.com, where he provided market analysis on economic data and corporate news. Based in New York, Ed is a regular guest on several major financial television networks including CNBC, Bloomberg TV, Yahoo! Finance Live, Fox Business and Sky TV. His views are trusted by the world’s most renowned global newswires including Reuters, Bloomberg and the Associated Press, and he is regularly quoted in leading publications such as MSN, MarketWatch, Forbes, Breitbart, The New York Times and The Wall Street Journal. Ed holds a BA in Economics from Rutgers University.
Ed Moya