The end of the bear-market rally?

Equity markets are struggling again on Wednesday, with the latest Chinese trade data highlighting the challenges facing the global economy going into 2023.

It would appear the recovery in stocks – bear-market rally, or otherwise – has run out of steam, and investors are left wondering whether what follows next is another test of the lows or simply a correction of that impressive two-month surge.

The difficulty investors have now is balancing the coming end of the tightening cycle with a potential global recession next year amid heavily discounted valuations. There’s clearly an urge to take advantage of the latter without any real foresight into how bad the decline is going to be, which is what makes it tricky. And also why some are referring to the move since October as a bear-market rally.

A terrible trade report

That confusion is oddly encapsulated by what we’re seeing in China right now, even if the moving parts are a little different. Of course, China is not immune to the global growth outlook, quite the opposite in fact, but the Covid evolution is very much unique to it.

On the one hand, investors are keen to celebrate the move away from zero-Covid with new relaxation measures being announced on an almost daily basis. On the other, the economic data has been pretty dreadful and the trade data overnight captures both its domestic struggles and the global decline.

Imports and exports continued to decline rapidly last month and that’s not a trend that’s likely to improve greatly in the months ahead. Sure, a relaxation of Covid curbs could stimulate more local demand but even that is clouded by the impact of a global slowdown, even recession, and how smoothly China is able to remove restrictions without overwhelming the health service. It’s easy to forget how challenging that was for other countries. Next year is going to be far from straight forward and the concerning numbers in the trade data may capture that better than the optimism over the end of zero-Covid.

An end to the RBI tightening cycle?

There may be some more relief in India, where the central bank raised rates by 35 basis points to 6.25% in what may be the final action in its tightening campaign. A lot can change between now and February but there’s every chance that inflation will ease early next year, enabling the MPC to move to a holding stance, and not put any further strain on the economy.

In need of an improvement in risk appetite

Deteriorating risk appetite is the last thing bitcoin needed right now, having missed out on the inflation relief rally amid the FTX fallout. It’s broken back below $17,000 but remains broadly around the levels it traded around for the last week or so. Risk appetite probably needs to improve significantly for bitcoin to break higher from here and so many will be hoping for a favourable PPI number on Friday and some less hawkish commentary from the Fed next week. And, of course, no further terrible news either on the FTX front or related to it.

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

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Craig Erlam

Craig Erlam

Former 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.