Don't Get Too Excited About Bear Market Rallies - Forex Action - Wakeupandsmelltheblog Don't Get Too Excited About Bear Market Rallies - Forex Action - Wakeupandsmelltheblog

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Don’t Get Too Excited About Bear Market Rallies – Forex Action

European stock markets fell sharply again on Wednesday, once again reminding us why we shouldn’t get excited about bear market rallies.

There is a desperation to add substance to the often large rallies that crop up in equity markets despite little or no rationale behind them and today is once again a lesson in why we shouldn’t bother. Similar to “if it sounds too good to be true, it probably is”, if stocks rally for no apparent reason, there probably isn’t. So it won’t last.

On Friday, I noted that triple witchcraft days were to be taken with a pinch of salt; this likely extends to the day or two after the markets readjust. And that’s normal, which it certainly isn’t. All the more reason not to get carried away with the deal earlier this week, which also happened on a US holiday; another possible red flag.

Last week, investors had to deal with an avalanche of monetary tightening, some expected, some certainly not. It’s not so easy to rule out, especially in the run-up to Jerome Powell’s two-day congressional testimony. The ‘R’ word is likely to come up a lot today and the president will have a hard time dodging it, especially with the midterms five months away. Naturally, he will do his best to remain apolitical, but I’m not sure investors will be able to ignore so much recession talk.

The BoE could be slightly encouraged by the inflation data

Nor can the British public ignore the reality of the recession. A summer of discontent is coming as the cost of living crisis rears its ugly head in the form of strikes. The second day of travel disruption begins tomorrow amid further fruitless negotiations earlier this week. With Brexit now behind us(ish) and mask mandates a thing of the past, it’s only natural that us Brits have come up with the next thing to talk about this summer. How exciting.

Inflation is unfortunately a very real and important issue, as evidenced by the May CPI data this morning. The BoE might be slightly encouraged by the base reading which fell a bit faster than expected. Energy and food continue to dominate the headlines, which the central bank cannot ignore, but today’s data could encourage them to continue on a path of gradual tightening against expectations of higher massive.

Are we witnessing a recession which is having repercussions on the oil markets?

Is falling oil prices the clearest sign yet of spreading recession fears in financial markets? With the stock markets, it was a death by a thousand cuts, as inflationary panic turned into fears of tightening and growth and finally into reality of a recession. The dynamics of the oil market meant that crude rebounded throughout this period as demand was strong and supply insufficient. Is all of this about to change?

There has been a clear shift over the past week and as far as I know there has not been a miraculous oil find that solves all the supply issues. But there has been much greater acceptance that a recession could be inevitable if central banks were to regain control of inflation. WTI is rapidly falling back towards $100 where it could see strong support.

Gold the outlier

Everything seems to be moving right now, everything except gold. The yellow metal is trading around a very familiar level – $1,840 – and shows little indication of deviating from here significantly. Maybe Powell can bring him back to life. Otherwise, the $1,800-1,870 range remains intact, as it has roughly done over the past six weeks.
Crypto dotcom moment?

Bitcoin clings to $20,000 for life with the fear that losing it again could see it spiral out of control. The market environment remains very unfavourable, as has the news lately. I also don’t expect any improvement, which could make life very uncomfortable in the short term.

An interesting story that caught my eye today is that of BoE Deputy Governor Jon Cunliffe suggesting it could be a dotcom crypto crash. The sink or swim moment that is digging up the Amazon and eBays of the crypto space and ridding it of the many that exist only to be the get-rich-quick vehicles that many hope they will be. Aside from the price crash, this could be a big time for cryptocurrencies.

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