Stock markets have steadied in Asia and early European trade on Tuesday but that is not reflective of the mood in the markets at the moment so it may struggle to hold.
The volatility in FX markets at the start of the week has been extreme but it’s also been building for weeks as authorities desperately try to arrest the decline in their currencies, particularly against the US dollar.
On Monday it was the UK that was front and centre following the mini-budget on Friday that showed total disregard for the environment in which it was being implemented. Promising much higher borrowing to fund huge tax cuts at a time of double-digit inflation that hasn’t even peaked is beyond bold and the backlash is well underway.
There’s nothing wrong with being ambitious on the economy but timing is everything and when the cost is much higher interest rates, there won’t be many winners and the economy simply won’t see the benefit. The question now is whether the pressure both externally and from within will force a rethink in order to settle things down.
The Bank of England did little to help. After speculation all day of an impending announcement, the central bank only sought to reassure markets that they stand ready to act but probably not until the next meeting in early November when it is armed with new macroeconomic projections. Needless to say, that reassured no one and sterling plummeted again after recovering amid the rumours of the announcement.
BoJ intervenes amid rising yields
It’s not just the UK that’s contending with a haemorrhaging currency, the Japanese Ministry of Finance was forced to intervene last week for the first time in 24 years in order to support the yen. Of course, while the UK’s problems appear largely self-inflicted, Japan is suffering as a result of a growing rate divergence that is worsening month to month.
So much so that the Bank of Japan was forced to intervene itself overnight with another bond-buying operation to the tune of 250 billion yen. The problem with yield curve control is that when yields are rising everywhere, pulling those in Japan with them, the upper limit is frequently tested necessitating intervention which in turn weakens the currency. It seems Japan is now stuck in an intervention doom loop until central banks elsewhere see peak inflation and therefore rates, or the BoJ loosens its grip and allows yields to move a little higher.
Oil pares losses ahead of next week’s OPEC+ meeting
Oil prices are recovering following the sell-off over the last couple of sessions. The prospect of a deeper economic slowdown, perhaps even global recession, has naturally turned traders more bearish on the price of oil as demand would naturally slump in those circumstances relative to prior expectations.
Of course, there is another side to that equation, supply. The message from OPEC+ earlier this month was quite clear; it stands ready to adjust supply if fundamentals change or volatility continues and prices no longer reflect the situation. While it has so far resisted the urge to hold an unscheduled meeting, the next showdown is next week so we should soon have a more updated view in light of everything we’ve seen recently.
In the meantime, we could see further pressure on oil prices if economic woes continue to dominate and traders want to test the resolve of the alliance in the face of severe global economic risk. In the midst of an inflation and cost-of-living crisis, you have to wonder why the group would want to keep prices artificially high in the short term as it will only make a global recession all the more likely.
Gold bouncing back but risks remain to the downside
Gold is rebounding after another terrible start to the week that saw it plunge back to $1,620, its lowest level since April 2020. It just goes from bad to worse for the yellow metal as traders continue to flock to the greenback and yields keep rising. The question for gold traders is how close are we to peak rate pricing and inflation. Obviously, the same question is being asked in all corners of the markets and so far, no one really has the answer.
With that in mind, it’s hard to build a bullish case for gold. Once we see signs of hitting that peak, we could see a recovery amid continued demand for safe havens. In terms of levels, it’s hard to say where that will come. The first test to the upside now is $1,640 followed by $1,650 and $1,680 but there still could be further pain ahead, with $1,600 being the next obvious test.
What’s driving the recovery in Bitcoin?
Bitcoin is staging a remarkable recovery amid a mild reprieve elsewhere on Tuesday which will no doubt excite a crypto crowd after another rough period. Turmoil elsewhere appears to have lifted bitcoin which has largely traded as a high-risk asset. This will undoubtedly stoke conversations about its role in the new economy, perhaps even reignite claims of its safe haven status. Naturally, I’m far from convinced but it’s certainly intriguing to watch unfold given the chaos we’re seeing elsewhere.