Growing Optimism?

Equity markets are pushing higher on Wednesday, buoyed by softer yields and some promising PMI revisions in Europe.

It would appear investors are increasingly coming around to the idea that central banks will be forced into cutting rates earlier than previously anticipated in order to support the economy. That would also suggest they anticipate inflation will subside faster than previously thought which would be welcome if true after a year of overshoots.

I’m sure this is a position that will change a lot in the coming months just as it has in those passed but it’s seemingly boosting risk appetite in the first week of the year. You just have to wonder how much resilience economies have in the interim to weather the cost-of-living storm.

This is where the other data points will become increasingly influential. The PMIs this morning, for example, were largely contractionary but only marginally so and the upward revisions for Germany, France, Italy, Spain, and the bloc as a whole will offer some encouragement.

I feel we’ll have a lot more clarity by the end of the first quarter in a number of ways from the path of inflation, terminal rates, and the ability of economies to continue to withstand those pressures. It will no doubt be a whirlwind quarter but one after which the rest of the year could look more promising. Or maybe this optimism is just a hangover from all of the festivities.

Fed minutes eyed

There’s plenty more to come today that could potentially dampen the mood, most notably the Fed minutes from the December meeting. The central bank is determined to reinforce its hawkish stance on investors and prevent an unwanted loosening of financial conditions and the minutes could be another opportunity to do so. Whether investors will be in the mood to listen is another thing.

And then there are the ISM manufacturing PMI and JOLTS job openings, both of which have the potential to shake things up during such an uncertain period. It promises to be a very interesting second half of the week.

Cautiously higher

There isn’t much to add on the bitcoin front. It remains in consolidation, buoyed slightly by better risk appetite in the market but still in the $16,000-$17,000 range. A move above here is possible if risk appetite remains positive but I’m not sure traders will get too carried away. Headwinds remain significant for cryptos and it may take some time for traders to get back on board.

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