It’s not been the most eventful session so far, but things could heat up later on Wednesday as we await inflation data from the US.
Markets are trading back in the red, which is where they’ve spent most of morning in Europe, as we await the open on Wall Street. Tuesday’s reversal appears to have been attributed to escalatory comments by Trump relating to Chinese tariffs, although following a six day rally in the Dow, this may just be a convenient excuse. In reality, the comments change nothing, are on trend with what we’ve come to expect from the President and don’t represent an escalation but they are maybe a good excuse to lock in some profit.
Given the size of the gains that have come since investors became more satisfied with the Fed’s approach to upcoming interest rate decisions, a couple of days in the red are nothing to worry about. Especially when we’re talking about the kind of losses we saw on Tuesday and are currently seeing today. Progress in trade talks at the G20 later this month would naturally come as a relief to investors, with the conflict widely being regarded as the greatest global economic risk, but dovish central banks are also doing a decent jobs for now.
Speaking of interest rates, today we’ll get inflation data from the US which will be of keen interest to traders. It may not be the Fed’s preferred core PCE measure but it is the most timely and will offer key insight into the direction of travel for prices and therefore how much pressure will be on the Fed at one of the upcoming meetings. As it stands, markets are expecting two or three hikes and the slip in inflation over the last year is only feeding into that, even with tariffs being imposed. Further evidence of this will only encourage policy makers that action may be necessary.
Oil sinks ahead of EIA inventory data
Another large inventory build, reported by API on Tuesday, is piling further pressure on oil prices, as we await a more widely followed release from EIA later today. Estimates suggest we may see a slight drawdown but that’s very much at odds with the near-five million barrel build that API reported. With oil now trading back near the recent lows, we could see a real test of whether there was actually any substance behind last week’s rebound.
A break below $50 in WTI crude could be a very bearish signal in the near-term while at the same time likely being influential when it comes to OPEC+ meets to discuss output cuts early next month. It’s just a question of how low we go before traders sit up and pay attention to the cuts. We could see some support around $48 and $46 below, with the December low around $44 being the greatest test.
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