This week promised to be lively and it didn’t disappoint but the final day is looking much more peaceful, with stocks slightly paring gains of recent days.
The week has been littered with central bank meetings and there has been so much to take away from them. The Fed is determined to taper this year despite rising risks and slowing growth, while the BoE is expected to raise rates sooner and twice next year as it prepares for higher inflation. Both view inflation as transitory, still, but not everyone is as confident as they were.
The CBRT is only committed to keeping interest rates above inflation as long as inflation remains below the repo rate. If they’re going to break a promise, they’ll do it properly and cut rates and cross their fingers. President Erdogan will be happy, Governor Kavcıoğlu will keep his job and the central bank will hope inflation does prove transitory and fall as anticipated. The lira is less forgiving and Kavcıoğlu’s credibility is shattered. This doesn’t have a tendency to end well and new lows in the currency may just be the start.
Evergrande caused quite the stir at the start of the week as it was days from missing coupon payments on yuan and dollar-denominated bonds. A deal was reached on the first while the second has passed without even a comment from the company. But seemingly that’s fine as long as the PBOC continues with its massive liquidity injections.
Buy the dip is alive and well it seems because the end result is that Evergrande remains at risk, central banks will soon be tightening and are increasingly concerned that inflation may not be quite as transitory as previously thought. Which begs the question, what exactly was the undesirable outcome for investors this week? It certainly makes the next few weeks interesting.
Next up is the German election this weekend which will mark the end of an era. Angela Merkel has been an ever-present through the various crises of the last 13 years and at the centre of many all-nighters during the darkest days of the debt crisis. And it seems that not only is Germany preparing to bid farewell to “Mutti”; the CDU may also be facing defeat for the first time in 16 years, with the SPD holding a narrow lead in the polls.
While the SPD look on course to win the election, negotiations to form the next government will be far from straightforward and may take months to conclude. So this weekend will be watched with interest but the market reaction may be minimal. Oil prices are a little lower on Friday following a couple of days of impressive gains. Evergrande remains a risk for China despite market concerns having seemingly abated considerably in recent days. Oil prices have been among the beneficiaries of that, not to mention production in the Gulf coming back online and sky-high gas prices.
PBOC takes another swing at cryptocurrencies
Cryptocurrencies were dealt a heavy blow on Friday as the PBOC announced that all transactions are illegal. Bitcoin was already pulling back after hitting USD 45,000 but the drop was accelerated after the announcement taking losses for the day to around 7%.
China’s opposition to cryptocurrencies is nothing new but the latest clarification would suggest those involved are at risk of prosecution. China’s actions haven’t held back cryptos’ rise too much in the past so I wouldn’t be surprised to see it bounce back once more. Where’s every crypto enthusiast’s friend, Elon Musk, when they need him?
Of course, this time it’s happening as bitcoin appears to have entered into a correction phase which may have contributed to its declines. A move below USD 40,000 could see it come under further pressure after such a long period of consolidation above here.
The fundamentals continue to look positive for crude prices; the developments in China being the primary downside risk in the coming weeks. Brent crude now has its sights set on USD 80, where it could once again see some resistance, with the next test for WTI being USD 75.The Fed delivered a hammer blow to gold’s hopes of recapturing USD 1,800 this week and the yellow metal now has its sights set lower, with USD 1,740 providing some support for now. A break of this could see gold eyeing up the August lows, with support perhaps coming first around USD 1,720 and USD 1,700.
With the Fed and others laying the groundwork for a new tightening cycle next year, gold faces a tough task making much ground to the upside from here. That said, there are numerous downside risks to their respective outlooks so I don’t expect the yellow metal to spiral lower. The road ahead is filled with potholes that could see gold shine once more.