Central banks are heavily in focus on Wednesday as we get a bunch of inflation data from across the globe and hear from a number of policymakers whose views on the trend will set the tone for the markets.
Stock markets have been struggling to build on a strong earnings season recently as inflation and interest rates have topped the list of investors concerns over the coming months. Given how long that list has become and the other risks on it, that’s saying something.
Gone are the days when bad news (data) is good news and central bank inaction keeps the party going in equity markets. Investors are increasingly concerned about the levels of inflation that we’re seeing and how widespread it is.
That’s not to say they all believe it’s here to stay and that extreme levels are just around the corner, but the higher the numbers get, the more widespread it becomes and the longer it lasts, the greater the risk. Which is going some way to dampening the good vibes from earnings season which gave the impression that the economy is on a strong trajectory.
Sterling pops as UK inflation piles pressure on BoE
The pound has popped higher on the back of the UK inflation figures this morning, which were higher across the board and surpassed expectations. Inflation rising to 4.2% from 3.1% and core up to 3.4% from 2.9% doesn’t make for easy reading, particularly for BoE policymakers that have backed themselves into a corner in recent months.
With the furlough scheme having seemingly come to a successful end without any significant jump in unemployment, as per the data yesterday and comments earlier this week, and inflation running hotter than expected, the MPC may have run out of excuses. There will be another labour market and inflation report next month in the days before the meeting but I struggle to see how policymakers can get out of this one.
Oil slipping ahead of EIA report
Oil prices are slipping a little again but continue to hold above the early November lows which is increasingly becoming a key level of support. A move below here – roughly $78 in WTI, $80 in Brent – could see a much deeper correction on the cards.
While the market remains fundamentally bullish, there are more reasons for caution at these levels which may be driving the pullback we’ve seen. Whether that be slower growth this quarter, lower oil demand forecasts from OPEC or the risk of an SPR release in the US. Traders have been given reason to lock in some profits after an extraordinary run.
There was nothing extraordinary about the API release on Tuesday, which showed a slightly lower inventory build than expected. The market popped slightly but quickly gave these gains back and proceeded to pare earlier gains ahead of the release. EIA is expected to report a similar gain of around one million barrels later today.
Gold in retreat ahead of Fed speak
Gold was in retreat on Tuesday after US yields and the dollar popped higher in response to the bumper US retail sales report. The yellow metal fell a little shy of $1,780 before turning lower and giving back around 1.5%. The rally had been losing momentum in the run-up to the report so it perhaps came at just the right time, allowing for some profit-taking to kick in and a decent correction.
The question now is how eager traders will be to buy the dips given how favoured the yellow metal has been as an inflation hedge. There is a lot of Fed speak to come today which will likely have a big say in whether we’re eyeing a run at $1,900 or a larger pullback. The yellow metal has found some support around $1,850 so far but the big test may be $1,833 where it saw such strong resistance prior to last week’s breakout.
A logical correction for Bitcoin?
Bitcoin is continuing to come under pressure this week and the correction could become more severe if we see a break of $58,000. This is roughly where it found strong support at the end of October and given how much it’s struggled to make major strides higher since, it could be the catalyst for a deeper correction.
There’s been lots of good news for bitcoin recently, be that the launch of ETFs or the Taproot upgrade and I wonder whether we’re now just seeing some profit-taking on those events. Both were expected, both were priced in, in advance, and with prices at record highs, it would be logical for some price correction to happen. Although that’s not always how this space works, as we’ve seen so often.
