Another promising rebound

We’re seeing a strong start to trading on Wednesday after what has been a very turbulent start to the week.

We’ve seen some sharp sell-offs already this week but investors appear to be encouraged by just how quickly and strong markets have bounced back. Monday looked like it was going to be a bloodbath in equity markets but rather than panic, investors poured back in and seized upon the lower valuations.

We saw this again after the close on Tuesday, when Microsoft earnings caused another wobble but reassurances around decelerating cloud growth were enough to trigger another wave of bargain hunting and we’re seeing that carry through to Europe today. US futures also look very healthy ahead of a crucial Fed decision later.

Fed misstep could have severe consequences

The Fed could have a big role to play in whether stock markets will build on these encouraging signs. As ever, every word will be poured over so I expect the central bank will take a very careful approach in its communication later on.

They need to be careful to find the right balance between taking inflation seriously and not overdoing it. These markets will be easily spooked so today is all about finding just the right balance. That means sending a clear signal about a March hike and alluding to discussions around balance sheet reduction towards the middle of the year.

We probably won’t get any specifics from Powell on when that will start or how fast it will happen, nor on how many hikes we’ll get this year. He will probably be keen to stress how seriously they’re taking it though and how they’ll do whatever is necessary. Ultimately, we may learn very little but the important thing is we don’t see a misstep as the consequences could be severe.

BoC expected to start aggressive tightening cycle

The Bank of Canada is unlikely to wait until March, with markets quite heavily pricing in a rate hike today and as much as six this year. This comes as inflation has risen to the highest level in 30 years and far above its 1-3% target range. With the labour market also tightening following a strong recovery from the pandemic, the time has arrived for accommodation to be removed.

The only question now is just how fast they’ll move and whether they’ll look to reduce their balance sheet, rather than just aggressively raise rates. The loonie has performed well recently, buoyed by very hawkish rate expectations and we could get more clarity on how accurate they are today.

Cause for optimism?

The recovery in bitcoin over the last couple of days has been really encouraging. After falling to around USD 33,000, more than 50% from its highs, the cryptocurrency has performed extremely well and finds itself 4% higher on the day around USD 38,000. It’s not out of the woods yet though and if broader risk appetite takes a hit, I’d expect bitcoin to suffer more. Whether that will see it test the crucial USD 30,000 region, only time will tell, but traders will be very relieved at what they’ve seen this week. The key test above is USD 40,000, a break of which could see momentum accelerate to the upside.

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

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