Investors relaxed after frantic start to the week

There’s been a lot to take in this week but investors appear very comfortable with what they’re seeing, taking the Evergrande debacle and Fed tapering warnings in their stride.

It’s quite remarkable just how relaxed investors are with the situation. On the taper discussion, the reaction is probably a testament to the Fed’s effective communication over a long period of time. While some may argue that taking this action during such an uncertain period is needlessly risky, they can’t argue that the central bank hasn’t been clear and consistent.

And the reality is that, while inflation concerns are clearly driving the argument a little more than investors maybe would like, this isn’t some knee-jerk reaction. Nor is the economy in bad shape. And the central bank has simply given itself until November to decide if paring back asset purchases is still appropriate, at which point the picture should be much clearer. And if they do, it will be a surprise to no one.

Ultimately, there weren’t many surprises at all from the Fed on Wednesday, with support growing a little for a rate hike late next year, assuming the economy continues to recover. The message is clear. Emergency stimulus is no longer necessary and the weaning process will begin very soon.

BoE eyes tightening next year

The Bank of England is clearly of a similar mindset to its counterpart across the pond, with the central bank today appearing to give the impression that the first hike next year may come sooner than expected. The MPC expects growth in the third quarter to be around 1% below its August forecasts – around 2.5% below pre-pandemic levels – while inflation is expected to peak a little above, rather than at 4%.

While the view at the Bank remains that inflationary pressures are transitory, there are clearly growing concerns that some may not be. Two policymakers voted for a lower package of asset purchases and will likely be pushing for tightening soon. Of course, the UK has a growing list of downside economic risks as well, with the energy crisis hitting it harder than most, the furlough scheme and some benefit top-ups soon drawing to a close, not to mention next year’s national insurance increase, to name a few.

So the outlook is far from certain and yet, traders are increasingly sure of a rate hike early next year, possibly as soon as February. The pound is rallying strongly on the back of the announcement, which is weighing on the FTSE, the only major European index now in the red.

CBRT Governor’s job is safe, same can’t be said for the lira

Another central bank that has been active today is the CBRT. Governor Şahap Kavcıoğlu previously vowed to keep interest rates above inflation, despite President Recep Tayyip Erdogan being firmly of the view that high interest rates fuel inflation, contrary to conventional wisdom.

Previous governors have paid the ultimate price for not ceding to Erdogan’s wishes and it seems Kavcıoğlu’s job is safe for now as the central bank opted to cut interest rates by 1% to 18%, despite inflation rising above the repo rate to 19.25% last month. While the CBRT has previously stressed that it believes inflation to be transitory and that it will fall later this year, the decision to cut is a bold one that could come at a much greater cost.

The dollar hit a new high against the lira just shy of 8.8, perhaps a sign that the market is of the view that the central bank is no longer acting independently and instead inviting further stress in the coming months. The CBRT has a tough job keeping investors on board now and will have to cross its fingers and hope for some favourable inflation data. But the damage may already be done.

Evergrande anxiety eases despite payment uncertainty

The Evergrande situation is clearly far from resolved but investors are much more comfortable with the situation than they were. The agreement reached on Wednesday with onshore bondholders that had been due an interest payment combined with the liquidity injection from the PBOC has taken the pressure off a little.

Perhaps we had better ignore the fact that no such agreement has been reached with offshore holders also due payment. Of course, the company has 30 days to settle these payments before it defaults but still, given the level of anxiety earlier in the week, investors have seemingly gone full 180.

Bitcoin rebounds but remains vulnerable

Bitcoin has rebounded well over the last couple of days, recovering from a sharp sell-off that saw it test USD 40,000. It passed the test on this occasion but may not be so fortunate in the future. It is currently seeing some resistance around USD 44,000 and a rotation off here could be quite bearish, given it was a major zone of support for many weeks.

For a look at all of today’s economic events, check out our economic calendar: www.marketpulse.com/economic-events/

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