European stocks are tumbling again on Tuesday, while US futures are marginally higher ahead of the open after a terrible start to the week.
Markets await FOMC meeting
The mood has turned very negative since the latter half of last week, with the ECB initially leaving investors in a haze and the US inflation data on Friday delivering the knockout blow. While Wall Street is eyeing a marginally higher open, I’m far from convinced it can maintain that ahead of the Fed decision tomorrow.
Expectations have turned more hawkish again with numerous calls for 75 basis point hikes overnight, which markets are now heavily pricing in. We’re now at a stage whereby if the Fed doesn’t deliver 75, the backlash could be quite severe. We’ll soon see whether the urgency within the FOMC matches that of Wall Street.
Against such a backdrop, it’s hard to imagine sentiment drastically improving any time soon. Part of the pause in the US may simply be a factor of the S&P hitting bear market territory and the proximity to the Fed interest rate decision tomorrow. I don’t think we’ll be seeing much FOMO dip-buying all of a sudden.
Now all the talk is about if we’re heading for a recession and how bad it will be. Given the pace of tightening that’s now expected from central banks, and some may see those ramped up further in the coming weeks and months, a soft landing has become incredibly difficult to deliver and we may see that language soften on Wednesday.
The Bank of England follows the Fed on Thursday and the temptation must be building to up the pace of its tightening considering it sees inflation hitting double figures late in the year. Markets now make it a coin toss between 25 and 50 basis points and the labour market figures this morning don’t make the debate any easier, with unemployment ticking higher and wage growth slowing modestly.
The Bank of Japan has an entirely different problem on its hands as its commitment to its yield curve control tool is forcing it to make huge bond purchases on a daily basis to keep the 10-year yield within its target range. This is having a devastating impact on the yen and yet the yield continues to test the limit. If this continues, the meeting in the early hours of Friday morning could be very interesting.
Oil edges higher but downside risks rise
Oil prices have steadied in recent days as economic fears and fresh Chinese restrictions have taken the wind out of the sails of the rally. The market remains extremely tight and further disruptions in Libya, where production has reportedly fallen by more than a million barrels a day since last year, aren’t helping matters.
Gold flat for now but could slip further
Gold is relatively flat on the day after breaking below its recent range at the start of the week. The yellow metal was pummelled as traders started pricing in more rate hikes which means higher yields and a stronger dollar. Even in risk-averse trade, gold was always going to struggle against that backdrop and if it intensifies in the coming days, USD 1,800 could come under significant pressure.
Bitcoin plunge could take out a huge level
Bitcoin has had a terrible start to the week and suddenly USD 20,000 is looking extremely vulnerable. Market conditions are far from ideal but it’s the reports around Celsius and Binance that are landing the heaviest blows. A move below USD 20,000 would be a massive psychological blow and could send bitcoin further into a tailspin.
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