We’re seeing modest losses across Europe this morning, while US futures have recovered earlier losses to trade a little flat ahead of the open on Wall Street.
Clearly, there’s plenty of uncertainty in the markets that’s been a drag on sentiment over the last couple of months but equally, investors are not conceding defeat easily. Perhaps their old friend TINA is driving this behaviour, as the fundamentals certainly do not justify such resilience.
While the lack of alternatives is certainly an argument for remaining long equity markets, it’s hardly a healthy reason. And this is after more than a decade of central banks effectively backstopping any sell-offs, which creates the FOMO buy-the-dip siege mentality that now looks relatively reasonable, by comparison.
But as we’ve learned over the last decade or so, no matter how hard it can be to justify the apparently inflated levels in stock markets at times, or how long and severe the list of downside risks become, we never seem to far away from a record high. Will this time be different as central banks withdraw pandemic stimulus measures and raise rates? It should and yet I doubt it.
For one, markets are pricing in some rather aggressive tightening from central banks over the next year or so (or phasing out of stimulus, in some cases) which could quite easily be unwound as economies slow and inflation shows itself to be largely transitory. A year is a long time, especially at a time when everything seems to be evolving so rapidly. It’s not that long ago that policymakers were convinced inflation was entirely transitory.
The next few months are huge in terms of how bad the energy crisis will become, what the knock-on effects will be, how bad another wave of Covid will be and what that will mean for economic recoveries as central banks grapple with inflation risks.
BoE about to make a mistake and raise rates too aggressively?
Which makes the idea of tapering and rate hikes this side of the new year all the more surprising. As we have seen, the pound has been punished as a result of the Bank of England’s apparent determination to raise rates at all costs. A move that is seemingly being deemed a policy mistake by the central bank that will pressure an already shaky recovery.
Or perhaps more worryingly, a sign that the worst is yet to come as the country faces up to the reality of a much greater inflation problem that threatens to weigh heavily on the economy? Either way, the currency has struggled and while it has bounced back this month, it is widely being viewed as a temporary recovery with more pain to come.
On the face of it, the labour market data from the UK today doesn’t look so bad and may support the case for the central bank to tighten monetary policy. But a quick look under the hood shows the numbers are flattered by various factors. The most notable being the furlough scheme which only ended last month and with 1.3 million making use of it, that’s a lot of people that may have since become either unemployed or underemployed.
While the average earnings increase of 7.2% in August also looks very healthy and a potential cause for concern, the number is far more modest when accounting for one-off factors, like a drop in the use of the furlough scheme. With those factors stripped out, the ONS believes the range is 4.1%-5.6%, which while still high is also likely to recede over time as employers face higher costs.
It may explain the additional angst on the committee, though, which will make the data between now and December interesting. Not to mention the monetary policy report in a little over three weeks when the BoE publishes its new forecasts alongside its rate decision. Either way, it will surely hold until at least December to see how the environment evolves in the interim.
Few signs of oil rally running on fumes
The rally in oil has been relentless in recent months as economies have continued to reopen, OPEC+ has resisted pressure to raise production faster and crude has been caught up in the energy price surge. The rally still has great momentum, with WTI on course for the fourth day of gains after closing above $80 for the first time since October 2014 on Monday.
While you can often see these rallies fizzle out as they become overcrowded – and most seem bullish on oil at this point – that doesn’t appear to be happening yet with the momentum indicators still looking perfectly healthy. Perhaps we’ll start to see that more as WTI approaches $84-85 or even $90, but for now, there are few signs of the rally running on fumes.
Of course, there are certain things that could change fundamentally to trigger a correction in prices. Additional supply from Russia, the approval of Nord Stream 2, OPEC+ increasing supply, for example. But equally, and maybe more likely, bullish fundamentals including further energy outages and colder weather could propel it even higher.
Gold range-bound but resisting higher US yields
Gold is making steady gains on Tuesday, but very much remains within its recent range, as traders still appear a little lost on what the future holds for the yellow metal. It seems gold is stuck in a state of paralysis at the moment as traders weigh up where exactly it sits in a slower growth, increasingly uncertain, tighter monetary policy environment.
For now, we could see further consolidation, with rallies facing resistance around $1,775 and sell-offs seeing support around $1,750. A significant breakout in either direction could make things a lot more interesting but in the interim, it seems we’re range-bound.
The fact that gold has held up so well as US yields rise is an interesting development in the markets that may suggest gold bulls have the upper hand in the near term, but that’s not what you would typically expect to see and will be an interesting one to monitor going forward.
Bitcoin eyeing new highs
Bitcoin is steady on Tuesday after making strong gains once again at the start of the week. We have seen it start to lose momentum on approach to $60,000 which is the next psychological barrier to the upside. But longer-term, there appears to be plenty of support behind the bitcoin rally which may point to new all-time highs in the not-too-distant future.
