Making sense of it all

European stocks are modestly higher on Friday, with Wall Street looking a little flat ahead of the open.

A choppy end to the week pretty much sums up how the rest of it has been, as investors have had to make sense of a wide range of data, earnings, rate decisions and geopolitical developments. And all at a time when there is immense uncertainty around the economic outlook as a result of inflation, Covid and the war in Ukraine.

Most central banks have come around to the idea that aggressive tightening is the only way we’re going to cut short this period of high and accelerating inflation, even if the cost of such action is a recession. The majority still think a recession is avoidable but I imagine that will change over the course of the remainder of the year.

ECB starts lift-off with a bang

The ECB super-charged its lift-off on Thursday, joining a now long list of central banks that have raised rates by 50 basis points or more. The Bank of England could be next in a couple of weeks, while the Fed could double that again and join the Bank of Canada in hiking by a full percentage point next week.

And yet, yields have been on the decline. Safe to say, that is not a reflection of the incoming inflation data which has largely been as disappointing as that which preceded it. Traders have at times clutched at straws as inflation expectations, for example, have slightly surprised in a rarely positive way but it doesn’t typically last.

Lower commodity prices – most notably oil – and indications of supply chain issues improving will certainly be welcome and could be providing a sense of optimism. But inflationary pressures have become more widespread so central banks will still have to tighten monetary policy much further.

The increasing prospect of recession probably has a role to play in yields falling; the argument being that it will weaken demand as the cost-of-living crisis bites and alleviate some of the tightness in the labour market which should in turn help lower domestic inflation. But is this really going to support the stock market or are we just witnessing another bear-market rally?

Then there’s earnings season. It’s still very early days but we’ve seen numerous cases now of earnings surprises driven by the “it’s not as bad as we feared” argument. That’s a relief of course, but surely not a case for a sustainable rebound. We’ll soon see whether that turns out to be the case but I’m not getting carried away yet.

Can crypto continue its recovery?

Bitcoin is on the rise again on Friday, only temporarily deterred by the news of Tesla dumping three-quarters of its holdings in the last quarter. For so long, Musk was an ally of the crypto community but it has recently fallen victim to his unpredictability. I think he’ll be an ally again in the future but perhaps not the reliable one he was once viewed as. In the near-term, the recovery is gathering support with USD 23,500-24,000 the next barrier to the upside. I’m still not convinced by its ability to make big strides higher, for the same reason I’m not in respect to equities or gold, but then crypto is an asset class unto itself and has often acted as such. Perhaps we’ll see that once more.

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

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