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Don’t get too excited by bear-market rallies


European stock markets are falling heavily again on Wednesday, reminding us all once more why we shouldn’t get excited by the bear-market rallies.

There’s a desperation to add substance to the often sizeable rallies that pop up in equity markets despite little or no rationale behind them and today is once again a lesson in why we shouldn’t bother. In much the same way that “if it seems too good to be true, it probably is”, if stocks are rallying for seemingly no reason, there probably isn’t one. So it won’t last.

On Friday I noted that triple witching days should be taken with a pinch of salt; that probably extends to the day or two after as markets readjust. And that’s in normal times which this most certainly is not. Another reason not to get carried away by the trade at the start of the week, which also occurred over a US bank holiday; another possible red flag.

Last week, investors had to contend with an avalanche of monetary tightening, some expected, some certainly not. That’s not so easy to just brush off, particularly in the run-up to Jerome Powell’s two-day testimony in Congress. The “R” word is likely to come up a lot today and the Chairman will have a tough time dodging it, especially with mid-terms in five months. Naturally, he’ll do his best to remain apolitical but I’m not sure investors will be able to ignore so much recession chat.

BoE may be slightly encouraged by inflation data

The UK public can’t ignore the reality of recession either. A summer of discontent is coming as the cost-of-living crisis rears its head in the form of strike action. Day two of travel disruption begins tomorrow amid more failed negotiations earlier this week. With Brexit now behind us (ish) and mask mandates a thing of the past, it’s only natural that we Brits have found the next thing to argue about this summer. How exciting.

Inflation is unfortunately a very real and significant problem though, as evidenced by the May CPI data this morning. The BoE may be slightly encouraged by the core reading which fell a little faster than expected. Energy and food continue to drive the headline reading which the central bank can’t ignore but today’s data may encourage them to continue on the gradual tightening path against expectations of super-sized hikes.

Cryptos dotcom moment?

Bitcoin is clinging onto $20,000 for dear life, the fear being that the loss of it again could see it spiral out of control. The market environment remains very unfavourable, as have the headlines of late. I don’t expect either to improve which could make life very uncomfortable in the short term.

One interesting story that has grabbed my attention today is BoE Deputy Governor Jon Cunliffe suggesting that this could be cryptos’ dotcom crash. The sink or swim moment which unearths the Amazon and eBays of the crypto space and rids it of the many that only exist to be the get-rich-quick vehicles many pray they will be. Crumbling prices aside, this could be a big moment for cryptocurrencies.

Trading analysis offered by RobotFX and Flex EA.