US consumer remains strong

Equity markets in Europe are back in the red on Wednesday, while the US looks largely unchanged around the open on Wall Street.

Reports of missile strikes in Poland on Tuesday naturally caused a shudder in the markets. The prospect of a sudden and unexpected escalation in the war in Ukraine, particularly involving a NATO state, doesn't bear thinking about but we were almost forced to and under the circumstance, the reaction was fairly modest.

It could have been much worse but investors appear to have come to the view that it was a situation that would be quickly de-escalated which is what occurred despite initial reports not looking good. ​

More strong Retail Sales data

US retail sales data will be a minor concern for investors as they continue to cross their fingers for a full Fed pivot next month. In an ideal world, the Fed could bring inflation back to target without causing much damage to the economy, while maintaining a strong labour market and healthy spending. But we don't live in an ideal world and it's unlikely that will be the case. So as long as we continue to see firm figures on employment and spending, the risk of high and stubborn inflation will remain. This won't provide the comfort the Fed wants in order to slow the pace of tightening and draw it to a close earlier than envisaged.

The news doesn't get any better for the UK

UK inflation hit a 41-year high last month as higher energy prices led to the CPI data exceeding expectations, as well as the BoE forecast for its peak. At 11.1%, the data implies a considerable squeeze on real incomes, with the pace far exceeding wages, which were confirmed to have risen 6% in the three months to September, yesterday (5.7% excluding bonuses).

The only upside is that this is expected to be as high as it gets. Of course, just as important is how quickly it's going to fall and the latest surprise to the upside isn't going to fill people with optimism. But with the cost-of-living crisis tipping the economy into recession, interest rates rising and the government about to enact a severe fiscal tightening, it's hard to imagine high inflation being sustainable for long.

With that in mind, I expect Bank of England Governor Andrew Bailey and his colleagues to continue to push back against the prospect of rates rising much further, as they did after the last meeting when highlighted the trajectory for growth and inflation under market-based expectations for interest rates. Today's surprise will be another blow for the central bank but I doubt it drastically changes its outlook.

Oil steadies after strikes in Poland

Oil prices are softer on Wednesday after a brief bout of volatility late Tuesday following reports of missile strikes in Poland. That unsurprisingly jolted financial markets, sending oil prices higher initially, but that quickly settled and crude prices are now back where they were before.

It goes without saying that any significant escalation in the war in Ukraine will likely add a substantial risk premium to oil prices, with Russia being a major producer and exporter, as well as one of the leaders in the OPEC+ alliance. A strike on a NATO member is an extreme example of that and could send oil markets into a frenzy. Thankfully, worst fears haven't been realised but investigations are still taking place which will keep oil traders on edge.

Gold battling resistance

Gold is struggling to take the next step higher after struggling around $1,780 once again today. That's not overly surprising considering this was a major level of support from January to July, at which point it gave way in style losing almost 4% in less than 48 hours.

What's encouraging is that it's not showing signs of easing up. Pullbacks have been minimal and pressure remains to the upside. A break of $1,780 could be the catalyst for another spike and ease any doubts about the sustainability of the rally in the process. Assuming both US inflation releases haven't done that already.

Is there a bullish case for cryptos?

Crypto HODLers may be relieved to see bitcoin finding its feet in recent days but I'm not sure they'll be feeling particularly comfortable with the situation. The headlines remain a concern and the price chart doesn't inspire confidence. In the near-term, it's hard to construct a bullish case for cryptos given the sheer amount of uncertainty in the space in the aftermath of the FTX debacle. That doesn't mean we can't see a recovery but it would certianly be the more surprising outcome at this stage.