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 would be a bloodbath in equity markets, but rather than panic, investors poured back in and seized upon the lower valuations rather than panic.
We saw this again after the close on Tuesday, when Microsoft's (NASDAQ:MSFT) earnings caused another wobble, but reassurances around decelerating cloud growth were enough to trigger another wave of bargain hunting, and we see that carry through to Europe today. US stocks 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 is far above its 1-3% target range. With the labor 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?
Over the last couple of days, the recovery in Bitcoin has been really encouraging. After falling to around $33,000, more than 50% from its highs, the cryptocurrency has performed extremely well and finds itself 4% higher on the day, around $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. The key test above is $40,000, a break of which could see momentum accelerate to the upside. 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.