It’s been an interesting start to the week as equity markets made strong gains early in the day before giving most back as the morning wore on.
US futures had a similar experience and Wall Street has opened a little mixed to start the week. What’s interesting about the moves is how happy investors are to turn a blind eye to a growing list of risks for the economy and markets.
In the space of a week, Evergrande has gone from being viewed as a potential Lehman moment to seemingly being nothing to be concerned about. In that time, one deal was reached with onshore bondholders, while an $83.5 million offshore coupon payment was missed without explanation and another $45m is due to be paid this week.
Policymakers are continuing to grapple with rising inflation which is both higher and potentially less transitory than previously anticipated. An energy crisis isn’t likely to ease those pressures, with households and businesses facing higher bills and input costs, which could exacerbate the supply and inflation issues further and make life very uncomfortable for central banks.
Thankfully, we’ll hear the views of many policymakers from a number of central banks this week who will no doubt be keen to reassure investors. ECB President Christine Lagarde got the week underway and stated that the view remains that the inflation upswing is “largely transitory” and while there are some factors that could lead to stronger price pressures, the baseline scenario remains that it will remain below target over the medium term.
Federal Reserve Bank of Chicago President, and FOMC voter in 2021, Charles Evans has aired his views today and they seemingly align with what the central bank put out last week, that conditions soon be met for tapering. Interestingly though, he claimed that he’s more uneasy about not generating enough inflation in 2023 and 2024 than living with too much now.
Fed policymakers Lael Brainard, John Williams and Neel Kashkari are also due to speak today. All err more on the dovish side typically so it will be interesting to hear their views on the recent trends and whether they support the plan to taper this year. Fed policy makers will be busy all week so there’ll be no shortage of views to get stuck into.
Negotiations to start towards traffic light coalition
The SPD narrowly won the German election over the weekend and will now seek to form a coalition in the coming weeks and months, with the traffic light coalition the most likely at this point. It was clear ahead of the weekend that weeks or months of negotiations would follow the vote so the impact in the markets has been minimal.
Negotiations between Olaf Scholz and the Greens and Free Democrats will be far from straightforward, particularly the latter, and with CDU head Armin Laschet seemingly not giving up hope of leading an alternative coalition, pressure will be heightened. The hard work begins now and in the interim, Angela Merkel will remain at the wheel.
Oil rally continues
Oil prices are continuing to surge, with Brent crude now closing in on $80 and WTI perhaps not too far behind it. The global energy crisis could see demand for crude rise if the northern hemisphere experiences a cold winter, with many countries not equipped to cope.
If momentum is sustained, pressure will grow on OPEC+ to speed up the pace that it increases output, after a historic production cut early in the pandemic. Plans to increase production by 400,000 barrels per day, each month, will see output return to normal by the end of next year but recent events may require the group to pick up the pace.
The last thing the global economy needs going into an uncertain winter period is a fuel crisis to top everything off. Producers may not rush into a decision though, with some potentially comfortable with prices at these levels and others wanting to see if further restrictions accompany Covid surges that weigh on demand.
Gold finding support after Fed blow
Gold is making small gains at the start of the week after once again finding support around $1,740 late last week. The Fed’s insistence that tapering is still the aim this year and a couple more dots suggesting a rate hike late next year could be on the cards dealt a heavy blow to gold prices last week and the outlook remains challenging if policymakers don’t change course.
With downside momentum seemingly slowing, gold could see some reprieve in the near-term but the broader outlook isn’t great. Inflation is typically part of the bullish case for gold but it’s very much working against it at the moment as it pushes central banks towards the stimulus exit doors. A significant uptick could see attitudes change. but for now, lower inflation and more central bank stimulus is seemingly more favourable for the yellow metal.
Bitcoin showing resilience once more
Bitcoin has quickly shrugged off the Chinese ban, it seems, with cryptos once again rebounding at the start of the week. Once again we’re seeing some real resilience in bitcoin, which at one stage was pushing $40,000.
It’s now rangebound between $40,000 and $45,000 and a breakout in either direction will be significant. It has appeared to be heading for a correction for weeks now and the break lower last Tuesday looked to be the catalyst but once again, it has found strong support. A move below $40,000 would be a psychological blow, while the technicals wouldn’t look great in the near-term.