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.
Will $70 be a floor in oil?
There’s been a lot to absorb for oil traders over the last week, some of which have created more questions than answers. The trade data from China was obviously another blow as it pointed to weakening global demand, as has become the norm from manufacturing and trade data around the world recently.
But at the same time, the country is finally navigating away from zero-Covid, a policy that’s often this year been a counter-force against the slow re-introduction of OPEC+ crude and the war in Ukraine. Now, with the balance in the market seemingly tilted towards oversupply, the reopening of China could prove supportive of the crude price.
Ultimately, the movements in oil markets depend on multiple moving parts which is why we’re seeing so much volatility but the trend has been negative for a number of weeks. The question is how much weaker it will get before OPEC+ steps in once more. Of course, the Biden administration has indicated it could start purchasing crude for the SPR when the price falls to $70 a barrel which could provide at least a temporary floor.
An eye on PPI
Gold traders clearly already have an eye on Friday’s US PPI report after the jobs report setback. While a good PPI number won’t heal all wounds, it could provide further evidence that inflation is cooling and allow for a less hawkish Fed next week.
The yellow metal peaked around $1,810 last week and is now consolidating in the $1,760-1,780 range. There’s clearly still plenty of bullish appetite there but there will be setbacks along the way, as we’re seeing now. The PPI could potentially be another. A break below $1,760 could see a bigger correction, with the next big level of support coming around $1,730 which has been very significant in recent months.
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.