By Craig Erlam, Senior Market Analyst, UK & EMEA, OANDA
Stock markets are marginally lower on Thursday, continuing the trend of choppy trade this week as we await more earnings reports.
The results we've seen so far have been very encouraging and that's continued over the last 24 hours, with Tesla surpassing expectations on the bottom line and Barclays continuing the trend of strong investment banking results and reserve releases that had previously been set aside for potential loan losses.
Tesla may have seen its shares slip a little in early trade but the numbers were encouraging in, what is undoubted, a challenging market due to the global chip shortage, port congestion and rolling blackouts. At a time when demand for electric vehicles is hotting up, difficulty meeting demand is surely a good problem to have.
Barclays kicked off earnings season for UK banks and did so in impressive style, following the lead from its US counterparts and providing investors with some comfort that the economy is in good shape, despite the large list of challenges. Interest rates in the UK are expected to rise significantly over the next 12 months which should provide a further lift to profitability.
Turkish Lira and CBRT credibility in tatters
The CBRT slashed interest rates by 2% on Thursday; a move that massively overshot expectations of a 0.5-1% cut and ended the debate on whether the central bank under Governor Şahap Kavcıoğlu is crumbling under the pressure of President Erdoğan. The lira was crushed, along with Kavcıoğlu's credibility, and faces a long road back.
From vowing to keep interest rates above inflation to abandoning it in spectacular fashion, the Governor has secured his job in the short-term but will no doubt be thrown overboard when the bill comes due. We've seen how this ends before and there's nothing to suggest this time will be any different.
The argument that inflationary pressures are only transitory just doesn't cut it. The Governor is taking a gamble in order to appease Erdogan, while the serious central banks that don't have a history of inflation problems are taking the risks more seriously. The lira has hit a record low after plunging more than 2% and it will take an enormous amount of good fortune for the central bank to improve its fortunes.
What next for Evergrande?
Evergrande shares are trading once more but their fortunes have not improved following the collapsed sale of a 51% stake in the company's property services unit to Hopson Development. With the company struggling for liquidity as pressure mounts to maintain projects and keep up debt repayments, despite tumbling property sales, it would appear it's running out of options.
Any hope that the company would find the funds to make an offshore coupon payment by the end of the grace period this weekend is surely now gone which could trigger a default unless the terms are renegotiated. The silence has been deafening in recent weeks though which could make trading later this week rather interesting as we move into the next phase of the saga.
Regulators have sought to shield other developers from the spillover effects, claiming funding needs are being met in an attempt to quell fears in the markets. The comments had the desired effect and if any country can contain this, it's probably China. At the same time, I always find these soothing tones a little unsettling rather than reassuring.
Fundamentals still bullish for oil
It would appear the oil rally is finally running on fumes, with Brent and WTI both off a little shy of 1% today. It's been an incredible run for crude prices and a little heat coming out of the rally is probably healthy. We may not see too large a correction though before interest picks up once more.
A move below $83.60 in Brent could see price pullback towards the $80-81 region, with the former being the neckline of a double top that's been forming over the last week. While this would be a healthy move, I'm not convinced it marks the end of the rally in oil prices, with the fundamentals remaining bullish which could ensure pullbacks are shallow.
We saw how traders reacted to Wednesday's EIA report despite crude prices trading down on the day at the time. There's clearly still plenty of support in the market and I expect that to continue unless something fundamentally changes in the interim.
Gold edges higher as dollar nears key support
It's been a choppy session for gold prices, which have been supported over the last week by softness in the dollar even as yields have risen and risk appetite remained strong. The yellow metal has been gradually trending higher over the last few weeks but is already seeing some resistance around $1,800.
Its relationship with the dollar remains strong, even if its other traditional correlations are less clear in this unusual environment, so a move above this resistance level will require a significant breakout lower in the dollar index, below support around 93.
Where next for bitcoin?
We may be seeing a little profit-taking in bitcoin on Thursday, a day after it jumped to new record highs following the launch of the ProShares ETF. While we may be seeing momentum dipping in the near term, which may lead to a slightly larger pullback, in the longer term it seems there's plenty of support for the rally. The next test is $70,000 but we're in uncharted territory so I'm sure we'll see far more ambitious projections in the coming weeks.
