Financial Mirror (Cyprus)

A busy end to the week

- By Craig Erlam

Stock markets bounced back on Friday, although no one is getting excited by the moves which pale in comparison to the preceding losses.

This looks like nothing more than a dead cat bounce after a steep decline over the last couple of weeks as investors have been forced to once again accept that interest rates are going to rise further and faster than hoped.

Double-digit eurozone inflation

Inflation in the eurozone hit 10% in September ahead of schedule, with markets expecting a jump to 9.7% from 9.1% in August. In normal circumstan­ces that may have triggered a reaction, but these are anything but normal.

Markets are still pricing in a more than 70% chance of a 75 basis point rate hike from the ECB next month, with an outside chance of 1%.

The euro is slightly lower following the release which also showed core inflation rising a little higher than expected to 4.8%.

Sterling recovers

We saw the third day of gains for the pound which has now recovered the bulk of the losses sustained after the “mini-budget” a week ago. This is not a sign of investors coming around the new Chancellor’s unfunded tax-cutting, but rather a reflection of the work done since to calm markets.

That includes the emergency interventi­on from the BoE, talk of measures to balance the cost of the tax cuts, reported discussion­s with the OBR and rumoured unrest within the Tory party.

We’ll have to see what that amounts to and sterling could react negatively again to inaction or the wrong action.

GDP data on Friday brought some good news, although as far as positive updates go, this is towards the more insignific­ant end.

The UK is not in recession after the second quarter GDP was revised up from -0.1% to +0.2%. While all positive revisions are welcome, the technical recession wasn’t really significan­t in the first place.

The important thing was that the UK is struggling to grow and facing a probable deeper recession down the road and Friday’s revision doesn’t change that.

Disappoint­ing Chinese surveys

China’s PMIs highlighte­d the widening gulf between the performanc­e of state-owned firms versus their private competitio­n. Being backed by the state in uncertain times carries certain advantages and that has been evident for some time. Private firms have been more sensitive to Covid restrictio­ns and have therefore been heavily hampered this year.

Still, even with those state-backed benefits, the headline PMI was far from encouragin­g rising to 50.1 and barely in growth territory. With the non-manufactur­ing PMI also slipping from 52.6 to 50.6, it’s clear that the economy still faces enormous headwinds and the global economy stalling around it will only add to them.

BoJ ramps up bond purchases

The Bank of Japan ramped up bond purchases as it continues to defend its yield curve control thresholds in volatile market conditions. Rising global yields have forced the central bank to repeatedly purchase JGBs in order to maintain its target.

There has been a growing expectatio­n that the BoJ could tweak its 0% target or widen the band it allows fluctuatio­ns between in order to ease the pressure on the currency but that’s not been forthcomin­g, with the MoF instead intervenin­g in the markets for the first time since 1998.

The interventi­on doom loop continues.

RBI rate hike

The Reserve Bank of India hiked the repo rate by 50bps to 5.9% on Friday, in what will likely be one of its final tightening measures in the fight against inflation. The decision was widely expected and followed shortly after by guidance to state-run refiners to reduce dollar buying in spot markets through the use of a $9 billion credit line.

The strength of the dollar is posing a risk to countries around the world, as we’ve seen very clearly in recent weeks, and measures like this will seek to alleviate those pressures. Much more will be needed to make any significan­t difference.

Oil edges higher

Oil prices are rising again as we head into the weekend, with the focus now on the OPEC+ next week.

There’s been plenty of rumours about how the alliance will respond to the deteriorat­ing economic outlook and lower prices.

A sizeable cut now looks on the cards, the question is whether it will be large enough to offset the demand destructio­n caused by the impending economic downturn. Not to mention how any cut would work considerin­g the shortfall in output targets throughout this year.

Brent continues to trade around the March to August lows having traded below here over the last week amid recession fear in the markets. We’re now seeing some resistance around $88, perhaps a sign that traders don’t believe OPEC+ will deliver a large enough cut to make a significan­t difference.

Gold recovery not sustainabl­e

Gold made gains for a fourth consecutiv­e day after a difficult start to the week.

While the recovery has been encouragin­g, it’s hard to imagine it building on it in any significan­t way as that would probably require rate expectatio­ns to have peaked and inflation perhaps to have as well. While that may be the case, it’s hard to imagine pressure easing from here which may maintain pressure on the yellow metal for a little longer yet.

Key resistance to the upside lies around $1,680 and $1,700, with $1,620 and $1,600 below being of interest.

Bitcoin needs period of stability

It’s been a very choppy week for bitcoin which has failed to make a sustainabl­e run in either direction, despite attempts at both. Perhaps we are seeing a floor forming a little shy of the early summer lows around $17,500, although that will very much depend on risk appetite not plummeting once more which it very much has the potential to do.

I keep using the word resilience when discussing bitcoin and that has very much remained the case. It did also struggle to build on the rally earlier this week, even hold it into the end of the day, so perhaps a period of stability is what it needs.

Craig Erlam is Senior Market Analyst, UK & EMEA at OANDA

Opinions are the author’s, not necessaril­y that of OANDA Global Corporatio­n or any of its affiliates, subsidiari­es, officers or directors. Leveraged trading is high risk and not suitable for all. Losses can exceed investment­s.

 ?? ??

Newspapers in English

Newspapers from Cyprus