ECB just getting started

(Craig Erlam – MarketPulse)

A mixed session in Asia overnight after Wall Street rebounded on Wednesday, while Europe is poised to open a little higher as well.

It’s been a frankly awful few weeks for stock markets so yesterday’s gains will come as a mild relief, albeit one I don’t think anyone is getting particularly excited about. Given the economic backdrop, this could be nothing more than a dead cat bounce. Of course, there may be more potential next week if the US delivers a favourable inflation report.

With the BoC and RBA both signaling a desire to ease off the brake in the months ahead, the Fed could be next if inflation allows, at which point we could see investors become a little more optimistic as they assess the damage. Perhaps the anticipation of another encouraging inflation report is what’s already tempting investors back in.

More bold action needed from the ECB

Of course, not all central banks are at the dovish pivot stage yet, in fact, the ECB is only just getting started. Today’s rate hike is only the second of the cycle and will take the deposit rate above zero for the first time in a decade. There’s a long way to go to get inflation in check which makes a 75 basis point hike all the more reasonable.

This is the problem with starting the process so late and learning nothing from the experience of other central banks this year, the ECB is forced to play catch up quickly and the economy could suffer the consequences. A recession looms for the euro area and the central bank is not going to make the process any easier.

Lockdowns persist

Asia appears to have missed out on the midweek rebound and China’s zero-Covid strategy may be to blame. The country announced an extension of the lockdown in Chengdu which exacerbated fears of an economic slowdown in China as it continues to push back against the yuan decline, support the property market and boost domestic demand. Clearly, the impact of its Covid stance stretches beyond its own borders and today it appears to be taking a toll on regional markets.

OPEC+ will be watching closely

Oil prices are rebounding slightly on Thursday, up almost 1%, after collapsing more than 5% a day earlier on renewed global growth concerns. With policymakers around the world still hawkish on interest rates, most notably in the US, and China locking down major cities in its zero-tolerance fight against Covid, the demand outlook is weakening.

After such a long period of supply driving the crude price, it’s demand that appears to be dominating now with traders anticipating a slowdown, maybe even a recession next year. I can only imagine how OPEC+ is taking the recent price moves, with its warnings and token cut seemingly falling on deaf ears. An emergency meeting may well be on the cards ahead of its scheduled October gathering.

Gold recovers as dollar pares gains

Gold enjoyed a little reprieve on Wednesday, as yields pared recent gains and the dollar pulled off its highs. I’m not sure we should get too excited about gold’s resurgence just yet, in fact, it’s already slipping a little today. The rebound means crucial $1,680 support continues to hold for now but given the backdrop of hawkish central banks and immense uncertainty in the markets, I’m not sure traders are ready to abandon the dollar just yet.

That said, it will be interesting if gold can manage to catapult itself back above $1,730 as that would suggest – in the short term at least – it has found some favour in the markets. With a double bottom perhaps forming in gold, a break of $1,730 could indicate a much more significant corrective move, even if the longer-term trend is still very much against it.

Sell-off momentum fading?

Bitcoin recovered a little on Wednesday after slipping to around $18,500 – its lowest level in almost three months – as broader markets pared recent moves. It’s lower again today though and appears to have quickly run into resistance around $19,500 where it had seen strong support in late August and early September. It’s not looking great for crypto, with bulls perhaps hoping sentiment in the broader markets can sustain some of yesterday’s lift. One thing worth noting is that momentum in the decline appears to be fading which could suggest we’re seeing some profit taking on approach to the June lows, which may support the price in the short-term.

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