A negative end to the week in Asia, and Europe has quickly followed as the prospect of much more tightening and a recession weighs on sentiment.
The last 48 hours have seen central banks around the world aggressively tightening as they continue their fight against high inflation. There are a couple of exceptions including the BoJ which instead facilitated the first FX intervention since 1998. Its policies have triggered mass selling of the yen this year due to the widening rate differential with others around the world.
And then there’s obviously Turkey which has decided to embark on a ridiculous monetary policy experiment at the worst possible time. The CBRT cut rates by 1% despite inflation running above 80% and watched as the lira hit a record low against the dollar. And we thought things were bad here in the UK.
How big a gamble will Chancellor Kwarteng take?
On that note, the new Chancellor Kwasi Kwarteng will deliver a mini-budget today in a bid to stave off a prolonged period of stagflation and rescue the government’s re-election hopes a couple of years down the line. While caps on energy bills will be welcomed, a lot of the rhetoric of recent days makes me nervous.
At a time of eye-watering inflation, terms like “not everything will be popular” and “disproportionately favor the wealthy” are quite concerning. Especially when former Bank of England policymakers are seemingly lining up to lambast the rumored announcements and in the case of Danny Blanchflower's tweet “Short the pound”. It doesn’t fill me with hope.
Gfk also reported this morning that consumer confidence hit a record low at -49 in September while the pound fell to its lowest level since 1985 and isn’t too far from its all-time low. The good news just keeps coming.
Which brings us nicely to the PMIs which brought even more good news. The manufacturing PMI for August did actually improve and beat expectations. Unfortunately, it remained in contraction territory and only represents a small part of the economy. The much more important services sector survey contracted faster than expected, falling from 50.9 to 49.2, meaning the composite PMI slipped to 48.4 from 49.6.
Pessimism spreading throughout the eurozone
The flash PMIs from the euro area this morning won’t improve the mood, with the surveys across the board either falling into or deeper into, contraction territory. The one exception is the French services PMI which surprisingly improved to 53. Considering what lies ahead for the bloc, I don’t expect we’ll see that continue much longer and I’m more inclined to view it as an anomaly than something that could shield the economy over the next six months.
Bitcoin showing encouraging resilience?
Bitcoin continues to display strong resilience in the face of a broader risk-averse mood in financial markets. Given it is the ultimate risk asset, this is quite surprising and perhaps even encouraging. Especially if a view forms that markets have priced in peak tightening which tempts investors back into riskier assets. The key technical levels haven’t changed though, with bitcoin seeing plenty of support around $18,000-18,500 and the big test not far below around $17,500 – the low from earlier in the summer.