An uninspiring start to trading on Tuesday, with Europe and the US hovering around flat on the day as focus turns to central bank meetings in the coming days.
The RBA got us underway today and to put it mildly, the performance was underwhelming. At a time when central bank communication is so important, policymakers have failed miserably this past week when put under pressure by the markets.
To simply abandon a policy tool, without warning, days before a meeting is unforgivable. It undermines their credibility after a period in which unconventional tools and trustworthy central bank communication has been the cornerstone of their monetary policy response, to borrow a phrase from another central bank that abandoned its flagship policy with far more severe consequences.
Other central banks have been on the PR offensive when it comes to preparing markets for upcoming policy changes. The Federal Reserve is almost certain to announce tapering on Wednesday as it pares back its pandemic response and prepares for rate hikes next year.
Given the path of travel for central banks around the world, I expect it will gradually accept that some hikes will be needed once tapering draws to a close, perhaps even immediately after. But that will become much more apparent in December when new forecasts are released.
The Bank of England won’t wait that long and may even start raising rates on Thursday. The market appears split on whether they will move this week, with either no change or a 15 basis point hike the likely outcome. While I’m probably in the latter camp, I wouldn’t be surprised if they even opt for 25 to give the tightening process a kick start.
There is the argument that they should wait until December to see what impact the end of the furlough scheme and benefits top-up, higher energy prices, Covid, etc will have on the economy. This makes sense, except for the fact that the MPC wanting to raise rates is an inflation play, not a reflection of our booming economy. Whether they act this week or next month makes little difference.
Oil slips ahead of OPEC+ but no increase expected
Oil prices are pulling back a little again today after recovering over the past three sessions. There remains plenty of reasons to be bullish on the oil market at the minute, not least the seeming unwillingness of OPEC+ to ramp up the pace of monthly output increases in the face of strong demand, a tight market, and high prices.
Who knows, maybe they’ll surprise us on Thursday and dial it up a little, even temporarily, but I doubt it. They’ve been through a period of low prices and with US shale not responding particularly quickly to these higher prices as their priorities have shifted, the prospect of high but not recessionary prices may appeal to many.
Especially when demand could soften over the winter months if Covid does trigger restrictions or more cautious behavior. One thing that could take some of the froth out of the market is Russia sending more natural gas supplies to Europe as Vladimir Putin recently suggested they are prepared to do. That could reduce demand for it as an energy alternative but ultimately, it’s OPEC+ that holds the key to lower prices.
Gold looking vulnerable ahead of FOMC
Gold is a little lower this morning as it continues to struggle to recapture $1,800 despite numerous attempts to break and hold above that key level to the upside. A close above here would be a big statement with a break of $1,810 then potentially setting the stage for greater gains to the upside.
But with the Fed probably announcing a taper tomorrow and maybe even laying the groundwork for rate hikes later next year, in keeping with hawkish shifts from central banks around the world in recent weeks and months, it may struggle. A stronger dollar could pile further pressure on the yellow metal as it already appears to have entered into a corrective pattern.
Gold broke below a rising channel on Friday as the price plunged after the US data and it’s failed to break back into it this week. It’s rebounded but only as far as the 50 and 61.8 fib levels, which fall around the lower end of the channel. A failure here, as we appear to be seeing, leaves it vulnerable to another run at $1,770.
Bitcoin heading for new highs?
Bitcoin is continuing to recover from its post-ETF pullback today, trading a couple of percents higher on the day and testing resistance around $63,500. How it trades around here could tell us whether we’re seeing a corrective rally as part of a deeper pullback in the bitcoin price, or another run for record highs. Whichever it is, I don’t think it will be long before we’re seeing the latter as there’s so much hype in the space right now.
