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Possibility Of More Pain Is Real

By Craig ErlamMarket OverviewJan 19, 2022 09:50AM ET
www.investing.com/analysis/possibility-of-more-pain-is-real-200615247
Possibility Of More Pain Is Real
By Craig Erlam   |  Jan 19, 2022 09:50AM ET
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Equity markets are recovering some of yesterday’s losses, but anxiety and uncertainty continue to dominate after a disappointing start to earnings season.

Inflation and interest rate concerns are going nowhere soon, and with traders now increasingly considering the possibility of hikes larger than 25 basis points, the possibility of more pain in stock markets is very real.

The idea that we could go from rock bottom rates and enormous bond-buying to rapid tapering, 50 basis point hikes, and earlier balance sheet reduction is quite alarming. We’re talking about markets that have become very accustomed to extensive support from central banks and very gentle unwinding when appropriate. This is quite a shock to the system.

And so far, earnings season is not providing investors the comfort they were hoping for. 

Significant compensation increases and lower trading revenues hurt JPMorgan Chase (NYSE:JPM) and Goldman Sachs (NYSE:GS). Higher wage demands are likely to be a common theme throughout the next few weeks, which will dampen the bottom line and not alleviate concerns about persistent and widespread price pressures.

UK inflation jumps again ahead of Bailey appearance

The CPI data from the UK this morning compounded inflation concerns, hitting a 30-year high and once again surpassing expectations in the process. And it’s highly unlikely we’re seeing the peak, with that potentially coming around April when the cap on energy tariffs is lifted considerably to reflect higher wholesale prices. Other aspects will also contribute to higher levels of inflation at the start of the second quarter, at which point we may have a better idea of how fast it will then decline.

Of course, the Bank of England can’t just turn a blind eye until then. The MPC may be willing to overlook transitory inflationary pressures, but the rise in CPI has proven to be neither temporary nor tolerable. Instead, it’s become more widespread, and the central bank is being forced to act and may do so again next month after raising interest rates for the first time since the pandemic in December. A few more hikes after that are also priced in for this year, but if pressures continue to mount, traders may begin to speculate about the possibility of larger hikes, as we’ve seen starting in the US.

All of this should make Andrew Bailey’s appearance before the Treasury Select Committee later today all the more interesting. The central bank has warned of higher inflation and possible interest rate hikes for months but delayed doing so after initial hints ahead of the November meeting. Given what’s happened since the decision looks all the more strange. Of course, it’s easy to say that with 20/20 hindsight.

Consolidation continues

Bitcoin appears to have gotten lost in the noise of the last few weeks. It’s not falling too hard despite risk assets getting battered, but it’s not recovering to any great extent either. Instead, it’s floating between support at $40,000 and resistance around $45,000 and showing no signs of breaking either at this point.

Possibility Of More Pain Is Real
 

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Possibility Of More Pain Is Real

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Comments (1)
Chad PoorerThanYou
Chad PoorerThanYou Jan 19, 2022 10:13AM ET
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Let's please cut down on the negativity. Sooner or later indicators will oversold and from there it will rebound.
Don Getty
Don Getty Jan 19, 2022 10:13AM ET
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a correction is about to happen - and then like in the past, markets will again rise - but we may see a little more reality in the PE ratios - or maybe not - retail investor will get hurt but hard to determine how badly
 
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