Piling on the misery

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.

Another bad day for sterling

On that note, Chancellor Kwasi Kwarteng delivered 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, there is plenty about it that won't be so popular and could exacerbate the inflation problem.

Some former Bank of England policymakers have been very critical of the announcements prior to being officially unveiled and one in particular, Danny Blanchflower, tweet "Short the pound". It seems plenty agree, with the currency falling more than 1.5% against the dollar today while the odds of more aggressive tightening rose alongside yields, which are now at levels not seen in more than a decade.

Gfk also reported this morning that consumer confidence hit a record low at -49 in September while the pound sank to its lowest level since 1985. 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, weighing on the composite PMI which 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 survey's 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.

Oil drifts lower amid recession risk

The threat of a global recession continues to weigh on oil prices, with widespread monetary tightening over the last couple of days fueling fears of a significant hit to growth. Central banks now appear to accept that a recession is the price to pay for getting a grip on inflation, which could weigh on demand next year.

At the same time, the market still remains tight and OPEC+ is perfectly willing to restrict supply further even as it fails to deliver on quotas it has set itself so far. What's more, a nuclear deal between the US and Iran looks no closer and Russia's mobilization could pose a risk to its supply.

As for the price cap that the EU is working hard towards, that's a big unknown as it may not even get the unanimous support it needs from member states. If it does, there's no guarantee it will work without the cooperation of those that Russia has been able to lean on since sanctions came in and if it is effective, Russia could reduce supplies and cause a price spike. With that in mind, very little is probably priced in at this point.

Is gold eyeing a correction?

It’s been a choppy week for gold amid all of the central bank tightening and yet it hasn't really progressed in that time. The break below $1,680 was a big deal but it hasn't really been the catalyst for anything since. While it hasn't accelerated lower so far, it does continue to see resistance at $1,680. How long for depends on whether all of this tightening becomes a trigger for a correction in the dollar and maybe yields.

If we do see a corrective move then the next big test may come around $1,730 which was previously a major level of support and then resistance. A break of this would suggest a much deeper correction may be underway. A break below $1,650 on the other hand could be viewed as a secondary confirmation of the initial breakout and be a very bearish signal.

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.