Asian stocks were flashing green on the second day of trading, while Europe is poised to open in a similarly positive manner as sentiment continues to improve, albeit from very low levels.
There’s still a strong feeling of a bear market rally about trading over the course of the last week. From the post-US-inflation rebound to what has now been a strong start to the week – in part driven by the UK’s decision to no longer shoot itself in the foot – nothing about this screams sustainable.
Of course, the last couple of months have been tough for equity markets since peaking towards the end of the summer and a rebound of some kind was going to happen eventually. I’m just not convinced there’s much substance behind it as the economic landscape looks treacherous and we don’t even know if we’re at peak inflation and interest rate pricing yet. Those are substantial headwinds that will make any stock market rebound extremely challenging.
RBA concerned about the outlook as it slows the pace of tightening
The RBA minutes, along with comments from Deputy Governor Michele Bullock alluded to the outlook as contributing to the decision to slow the pace of tightening at the last meeting to 25 basis points. While the central bank will continue to hike rates in order to fight inflation – highlighting the broad-based pick-up in prices and higher wages – it’s clearly uneasy about the economic consequences and the lags in policy after hiking rates 2% over the course of four months since the summer. The Aussie dollar has not performed well in that time, falling around 15% from its June highs against the greenback, although it has rallied a little overnight.
When will Japan intervene again?
The yen remains under pressure despite desperate attempts by Japan to influence the currency markets through direct and verbal intervention. Last month’s intervention was substantial but short-lived and the commentary before and after has fallen on deaf ears. Overnight there was more of the same – “a high sense of urgency”, “will take appropriate action decisively” – and even a refusal to comment on whether the Ministry of Finance is conducting “stealth FX intervention”. If it is, it isn’t working particularly well, with the yen now very close to 150 against the dollar, a level that may make traders a little nervous. Another big intervention may soon be on the cards, although Japanese officials may be uneasy about the limited effectiveness of the last. What more can and will they do?
The environment remains challenging
Bitcoin has its sight set on $20,000 once more as it continues to bounce back from last week’s plunge. The sell-off occurred around the release of the US CPI data which could have sent it spiralling lower but risk appetite more broadly quickly bounced back and so did bitcoin. Whether it can continue to do so unless sentiment improves more sustainably is another thing. It continues to show resilience around $18,000 – $20,000 where it’s traded for most of the last couple of months but that may not be enough if risk appetite worsens again.