Investors undeterred

Stock markets are making decent gains on Tuesday, bouncing back quickly from the disappointment late Monday as Fed Chair Powell turned the hawkish dial up a notch.

It didn’t take long for investors to get over the latest disappointment as they prepared for interest rates rising to around 2% by the end of the year. That’s an incredible aggressive tightening cycle and would mean at least one 50 basis point hike at a meeting, something we haven’t seen in more than 20 years.

Despite recession talk rearing its ugly head as people question whether the economy can withstand such a rapid tightening, it’s clear that investors are not being deterred. You start to wonder what exactly will put investors off at this stage as the yield curve is very close to inverting – a recession signal – and the central bank backstop is being withdrawn.

It’s not like the situation in Ukraine is improving, even if negotiations are continuing with Russia. Perhaps there’s a belief that the invasion is now priced into the markets along with high commodity prices. But that ignores the prospect of further escalations and commodity prices rising further.

Of course, there’s no simple answer to all of this. But the fact that equity markets have recovered as much as they have is no doubt interesting. Is it complacency? A result of the buy-the-dip habit that’s proven so rewarding over the years? Or is there something more fundamental? Powell certainly seems to believe the economy can withstand such a sharp increase in interest rates. Maybe investors share his optimism.

Bitcoin boosted alongside risk assets

Buoyed by the rebound in risk appetite on Tuesday, bitcoin has jumped more than 3% and, importantly, broken above USD 42,000 which will put the focus back on USD 45,500 where it has repeatedly run into resistance. Whether it can break beyond that may well depend on how well risk appetite holds up.

For a look at all of today’s economic events, check out our economic calendar:

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