Stock markets recovered earlier losses on Monday and are adding to that in early trade on Tuesday, with Asia also posting strong gains.
The turnaround in risk appetite appears to have been driven by another deterioration in PMI surveys as traders speculate that such weakness could be a precursor to slower monetary tightening. If that sounds like straw clutching, it’s probably because it is, but then, equity markets have had a rough ride of late, and that can’t last forever.
The deceleration begins
The RBA became the first major central bank to slow the pace of tightening overnight, hiking rates by only 25 basis points against expectations of another 50. After four super-sized hikes, the RBA determined it could start to ease off the brake and is on course to hit its inflation target over the medium term.
Of course, this had nothing to do with weak PMI surveys, but it will probably assist the narrative that a global deceleration in rate hikes is underway, which could boost risk appetite further. Markets do love to set themselves up for disappointment. The jobs report on Friday could quickly put an end to that.
Damage control
The pound has continued its recovery this week amid reports that UK Chancellor Kwasi Kwarteng will unveil his second u-turn in 24 hours. Despite repeatedly insisting otherwise, Kwarteng is poised to announce that the government’s debt-cutting plan will be brought forward – perhaps later this month – alongside OBR forecasts to calm the markets.
While the damage to the pound can be undone, the needless reputational harm the government has suffered won’t be as easily repaired. The Chancellor has shown a flagrant disregard for the markets – and the general public for that matter – and that will take time to undo. The move is a welcome first step. Now, he must convince everyone that his plan is credible and won’t come at a significant economic cost.
Less enthusiasm for Bitcoin
The risk relief rally extends to Bitcoin but perhaps to a lesser extent, with the cryptocurrency up a little over 1%, but still shy of $20,000. The slight disconnect between bitcoin and other risk assets recently has been interesting.
We’ve seen more resilience during downturns and seemingly less enthusiasm during rallies. It will be interesting to see whether this relationship holds and what that means going forward.