Cautiously Optimistic

Equity markets had a positive start on Wednesday as we awaited a slew of big economic releases and a speech from Fed Chair Jerome Powell.

It’s already been a very headline-driven week, particularly where oil is concerned, while Covid restrictions and protests in China have very much set the tone in Asia, and to a lesser extent elsewhere.

The headwinds facing China are intensifying and the protests of recent days could make it even more challenging to navigate. That said, what we’ve heard so far has been promising and potentially indicative of a plan that was already in the works.

But we shouldn’t kid ourselves. In the event that China commits 100% to its vaccine drive, especially among the elderly and vulnerable, the move away from zero Covid will take time as the virus spreads rapidly throughout the country necessitating swift action to control the spread. Even the best-case scenario is one of significant turbulence for the world’s second-largest economy next year.

Chinese PMIs highlight the challenges ahead

The PMIs highlight just how difficult the situation is in China, with the zero-Covid stance combined with the property market crackdown severely impacting domestic sentiment, while a slowing global economy weighs on external demand. With both the manufacturing and non-manufacturing PMIs falling deeper into contraction territory than anticipated, the country really has a mountain to climb in order to achieve decent, consistent growth once more.

Some rare good news on inflation

The euro was a little higher on the day against the dollar after CPI data for the currency bloc slowed to 10%, far below market expectations of around 10.4%. While still extraordinarily high, it does offer hope that inflation may have peaked and the deceleration could be faster than anticipated, in much the same way it was on the way up.

The single currency was choppy in the aftermath of the release, while markets now view the possibility of a 50 or 75 basis points hike in December as a coin flip after previously heavily favouring the latter. That could be a positive for the euro if it means less of an economic slump, with the bloc already likely heading for recession.

Rising for now

Bitcoin made steady gains in the session, up more than 2% and eyeing a second positive session. It did run into resistance around $1,700 again, the upper end of its range over the last couple of weeks. While we could see a bigger correction to the upside, especially if we’re treated to some dovish commentary from Powell, I’m not convinced it would be anything more than that. The industry has been shaken by the FTX collapse and as a result, bitcoin could remain vulnerable to further plunges in the price.

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