It was a tense week for global markets as investors tussled with key risk events and numerous central bank meetings.
A wave of risk aversion engulfed Asian shares on Monday as concerns about China Evergrande group's debt situation left market players on high alert. It's worth keeping in mind that Evergrande is the second-largest property developer in China by sales with a debt burden surpassing $300 billion.
Fears over a contagion spreading to markets beyond China in the event of a default sent shockwaves across the board.
The mood across markets remained fragile on Tuesday thanks to the ongoing drama revolving around the Evergrande group. Adding to the gloom, the Organisation for Economic Co-operation and Development (OECD) cut its global growth forecast to 5.7% for 2021 from 5.8% in May. In the currency markets, the dollar was choppy, while gold extended gains to kiss $1780 and oil prices rebounded.
Our trade of the week with the GBPUSD. We questioned how the Federal Reserve and Bank of England would impact the currency’s outlook. Given how the Fed and BoE were hawkish this week, this could result in more volatility in the GBPUSD as both currencies fight for dominance.
Looking at the technical picture, the GBPUSD remains under pressure on the daily charts with prices wobbling around 1.3670 as of writing.
Mid-week, it was all about the Federal Reserve policy meeting. As widely expected, the central bank left monetary policy unchanged in September. However, Mr. Powell signalled that tapering could start as soon as November with the process ending by mid-2022.
On top of this, the dot plot showed nine officials forecasting a rate rise in 2022 compared to the seven seen in June.
Dollar bulls were injected with confidence following the meeting, with the dollar index (DXY) slamming into 93.50.
For more information about the Fed meeting and what the dot plots mean, check out the podcast below.
Markets Extra’ Podcast
In other news, global stocks staged a rebound on Wednesday as investors placed their hopes on policymakers preventing Chinese property developer Evergrande from defaulting. The People’s Bank of China pumped $17 billion into the financial system to soothe jitters while the struggling real estate firm said it had resolved a scheduled payment.
On Thursday, the Bank of England left monetary policy unchanged as widely expected. Although there were concerns about rising inflation, the bank stressed that no immediate action was needed to tame price rises. An interesting takeaway was the fact that two policymakers called for an early end to its quantitative easing program.
As the week slowly came to end, the rally in oil markets snatched our attention. WTI oil prices were on route for a fifth straight week of gains thanks to a drawdown in U.S crude inventories.
WTI has ventured to levels not seen since October 2018 and is currently up roughly 3% this week. If the upside momentum holds, prices could test $75 and beyond in the week ahead.
There was some breaking news that sent cryptocurrencies tumbling on Friday. China was in the spotlight again after declaring all crypto-currency transactions illegal, essentially banning digital tokens like Bitcoin. Given how China is one of the world’s largest cryptocurrency exchange, this is certainly a big deal and something to keep a close eye on in the week ahead.
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