There isn’t an enormous amount of momentum in the markets at the moment and that’s being reflected in stocks which are once again treading water on Tuesday.
Europe is on a slightly positive trajectory but we’re talking incremental gains each day that don’t add up to much and could collectively be wiped out in a moderately negative session. The US, as we’re seeing in large parts of Asia, is a little choppy and not making any significant moves in either direction, with Wall Street eyeing a slightly positive open. Asia ended the day a little mixed with the Hang Seng standing alone in making decent strides forward while other indices were broadly a little lower.
We still seem to be caught between two strong counter-forces, a strong earnings season providing the bullish case and a long list of downside risks – most notably inflation and interest rates – which continue to weigh on sentiment. This could make for some choppy trading into year-end although it’s notable that we’re seeing strong resilience despite all of the uncertainty around central banks.
One additional layer of uncertainty is who will lead the Federal Reserve out of the pandemic, with the position reportedly down to two candidates – Chair Jerome Powell and Governor Lael Brainard.
A decision is reportedly due very soon and based on how markets reacted when they learned Brainard was in the running, it’s clear who’s viewed as the more dovish between the two. Ordinarily, that would make her the stock markets pick but that may not necessarily be the case if investors view inflation as a greater risk than the central bank perceives, making inaction the less desirable approach longer term.
UK labour market paves way for December BoE hike
Data released this morning suggest the UK labour market is in a far healthier position than many feared. We’ll have to wait a month to see what the full hit will be, with today’s unemployment data only covering the three months to September, after which the furlough ended. But what we did see from the report in relation to October payrolls was encouraging. Which makes the December BoE meeting very much a live one.
This follows comments from Andrew Bailey on Monday when he reiterated that the central bank held off on raising rates this month in order to assess the state of the labour market in the aftermath of the furlough scheme. The picture will be clearer again when the October report is released two days before the MPC meeting.
Today’s report, along with comments from MPC members yesterday, suggests that the majority of the 1.1 million people that were still using the furlough scheme in September have returned to work. Of course, this doesn’t tell us about the number who went back on reduced hours and now qualify as underemployed, contributing to the slack in the labour market. The question now becomes how much demand there’ll now be to fill a large number of vacancies without putting much upward pressure on wages and inflation.
Meanwhile, flash GDP data showed growth in the euro area rising 2.2% in the third quarter, leaving the economy just 0.5% smaller than the final quarter of 2019. Employment also rose by 0.9% in the last quarter. Surges in virus cases, supply problems, slowing Chinese growth and more will continue to be major headwinds for the economy in the current quarter when growth is expected to slow.
Oil edges higher off lows
Oil prices are marginally higher on Tuesday after once again seeing strong support around early November lows. We’ve seen the rally lose momentum recently as growth slows in the final quarter of the year, OPEC revises down demand growth and the White House threatens to release reserves from the SPR.
We’ve seen some incredible gains in the oil price this past few months as OPEC+ has resisted raising its output target, despite mounting pressure from consuming countries. Higher oil prices are contributing to inflationary pressures and are another headwind for the economic recovery this winter.
We could see prices pull back a little further if the economy continues to slow and rising virus cases further weigh on demand, as OPEC+ has anticipated, but this remains a bullish market and I expect dips continue to attract plenty of interest.
Gold rally losing momentum ahead of Retail Sales
Gold is pushing higher once again, supported by higher inflation indicators which continue to push down real yields. The yellow metal is traditionally viewed as a hedge against inflation and that’s exactly what we appear to be seeing now. The last couple of weeks has delivered strong gains for gold which now has its sights set on the summer highs above $1,900.
We shouldn’t get too carried away yet though. It’s up more than 5% from its November lows and quickly losing momentum, which should catch up at some point. Of course, it could regain momentum, say following the US retail sales report today, but recent trading suggests it’s running out of steam and a correction may be on the cards.
Deeper correction for Bitcoin?
In a sign of how different asset classes can be, while I’ve just referred to a 5% gain in gold over a couple of weeks as being very strong, today’s 5% decline in bitcoin is anything but extraordinary. No panic is setting in when bitcoin slips 5% in the way it would for the yellow metal.
The cryptocurrency has quickly seen support around $58,500 after breaking below $60,000, where it also rebounded off just a few weeks ago. A break of this level may point to a deeper downturn, with attention perhaps shifting back towards the $50,000 region, but as ever with bitcoin that is never clear. There is incredible support in the space and a big rally towards the highs never feels that far away.
