No more festive cheer

A mixed start to trading on Tuesday as traders return following the festive break to some rather gloomy forecasts for the coming year.

The IMF is among those warning of a tough year, more so than the one we've just left, as the simultaneous slowing down of the US, EU, and China takes its toll. Of course, all forecasts at this moment are subject to enormous uncertainty around the war in Ukraine, inflation, interest rates, and China's Covid response, among others, but it seems almost everyone is going into 2023 with a healthy dose of trepidation.

And following a series of nasty shocks last year, who can blame them? There is the potential for surprises this year to be of a more positive nature, of course, but as it stands, the outlook is understandably gloomy and will remain so unless something significant changes, either on the war in Ukraine or inflation.

If inflationary pressures remain stubborn - and a strong, successful transition from zero-Covid to zero restrictions could enable that - then central banks will have little choice but to continue tightening monetary policy in order to bring it down. That is something the IMF strongly urged them to do, with stubbornly high inflation deemed a far greater risk over the longer term.

As far as the economic calendar is concerned this week, we're easing ourselves back in today with mostly revised PMIs and other tier-three data. Things will pick up on that front from tomorrow, with the December Fed minutes being released alongside some more significant data and that will continue into the end of the week when we get the first jobs report of the year.

One interesting release this morning came from China, where the Caixin manufacturing PMI painted a less pessimistic picture than the official number over the weekend. While the surveys are different in the kind of firms they cover, it was interesting that the official number pointed to greater concern around the sector at the moment. That said, there does seem to be some promise in the Caixin future output index which suggests firms are more optimistic about the longer-term outlook since Covid-zero was abandoned despite the prospect of near-term difficulties.

Oil recovery continues

Oil prices are a little higher this morning as they continue to rebound strongly from their lows. Brent and WTI have recovered almost 15% from the lows a few weeks ago as traders continue to price in stronger Chinese demand. At the same time, the US is looking to refill the SPR after huge withdrawals during last year's oil price spike.

The outlook remains highly uncertain though which should ensure oil prices remain highly volatile. The G7 price cap has had little impact so far, the same can be said of Russia's response, but that could change if oil prices keep moving higher, nudging Russian crude ever closer to the cap level and forcing some very difficult decisions.

Finding momentum

Gold is rallying strongly on Tuesday, up more than 1% and gathering momentum after seeing it slip in recent weeks. The yellow metal appeared to be stuttering around $1,800 but that's suddenly changed, perhaps buoyed by the mild risk-aversion we're seeing in the markets and the expectation that the environment is looking more favorable.

This could be a year in which global growth slows significantly and traders are questioning whether that will warrant monetary policy to be loosened later in 2023. Central banks have pushed back strongly against the idea and I imagine the IMF would too at this point but we could see markets moving in that direction if the data doesn't continue to haunt us.

Range-bound

Bitcoin has remained quite stable recently, hovering in the $16,000-17,000 range over the last few weeks. That may come as a relief to the crypto crowd after another rough few months. The new year no doubt has plenty in store for cryptocurrencies but in the short term, the community may just be hoping for no new scandals that will drive investors away.