Treading water

Stock markets in Europe are treading water in thin trade at the start of the week amid a light economic calendar and a US bank holiday.

It was always likely to be a slow day under the circumstances and that's exactly what it's turning out to be. Stock markets remain in a surprisingly strong position despite the uncertain outlook and rising interest rate expectations due to stubborn inflation.

While other areas of the market appear to have adopted a more defensive position, equity investors remain undeterred. It would appear it's going to take a lot more than a few nasty economic releases to put a dent in their optimism.

China optimism remains

The outlier is once again China, where stocks have enjoyed a very good start to the week. That came despite one and five-year loan prime rates remaining unchanged, as was widely expected following last week's MLF hold.

The bullish case for the Chinese economy remains solid and the likely release of stimulus over the next couple of months as it gathers pace could super-charge that. Domestic demand is going to be the cornerstone of the economic revival and policymakers appear poised to unleash that to its full potential. How they plan to do so should become clearer over the next month although we've already seen big steps in the right direction.

Choppy trade continues

Oil prices are bouncing back a little after slipping throughout the last week from their recent highs. The optimism around China today may be responsible for the gains we're seeing in crude which would make a lot of sense given it's the world's largest importer and expected to recover strongly from the Covid transition.

But as we've seen over the last few months, there's more to this story than just China and the decline over the last week was likely a reflection of more pessimistic global expectations against the backdrop of higher interest rate forecasts. Sentiment remains very fragile and the economic data is inconsistent. Until we see an improvement in the latter, the former will likely remain choppy, as will the price of oil.

Does the correction have further to run?

Gold traders do not share the eternal optimism that equity and crypto traders possess and recent weeks have highlighted that perfectly. The yellow metal fell into a corrective pattern and has struggled to get out since. It pared some losses on Friday to end the session higher around notable support in the $1,820 region. The long lower wick from the days' trade may be a bullish signal in the near term, although I'm not convinced the correction has run its course. Below here, the key zone falls around $1,780-$1,800.

Eternal optimism

Cryptos are seemingly existing in a world of their own with bitcoin rising 2% again on Monday and eyeing the highs of the last week once more. This could be a really pivotal level for bitcoin and a break of it could generate plenty more enthusiasm. And we've all seen what happens when enthusiasm and euphoria exist in cryptos. The price can take off regardless of fundamentals or broader sentiment. That isn't to say we'll necessarily see that on this occasion but the 50% recovery so far this year does suggest something may be happening.