Premature optimism

Stock markets are edging lower on Thursday, paring back this week's gains as the Kremlin denies substantial progress in talks and the Fed begins its aggressive tightening cycle.

As ever, we need to take commentary coming from the Kremlin with a pinch of salt, both good and bad, but the latest comments have come as a blow to the markets. We've seen cautious optimism building in the markets this week as the two sides appeared to be making progress, even if it was occurring against the backdrop of more horrific Russian attacks in Ukraine.

But they serve as a reminder that there was an enormous gulf between the two starting points and ultimately, a deal will only be reached if both sides are serious about doing so. Given the difference between the rhetoric and the actions of the Kremlin over the last couple of months, I'm not filled with hope and this presents a major downside risk for the markets.

Fed ramps up interest rate projections

The Fed meeting on Wednesday was a rarity, in that the central bank quickly conformed to the market's way of thinking after months of pushback. The Fed now sees six more rate hikes this year, on top of the one announced yesterday, representing a 25 basis point increase at every meeting for the rest of 2022.

And with a large minority forecasting even higher rates by year-end, the chance of a 50 basis point hike at a meeting has certainly increased. The rhetoric from Chair Powell and his reference to the labour market being tight to an unhealthy level further supports the view that the rate of increases this year will be substantial. Now it's just a question of whether the Fed's actions, combined with moves in commodity markets, will become recessionary, something the markets may be starting to price in.

BoE pares back expectations

The Bank of England took a very different approach today, raising interest rates by 25 basis points, before paring back expectations going forward. It was quite remarkable that one policymaker, Jon Cunliffe, voted against a rate hike considering inflation is at 5.5% and is expected to peak above 8%.

But it was this, combined with a slight softening in the language around future tightening that pushed markets to slightly pare back expectations for rate hikes this year. From being likely to it might be appropriate to tighten further is only a slight tweak but perhaps it comes earlier than expected. Still, markets are pricing in another 100 basis points of hikes this year, something the BoE doesn't seem to be on board with.

CBRT to pursue disinflation as self-inflicted inflation continues to surge

The CBRT left interest rates unchanged at 14% today, as expected, and claimed it will pursue disinflation decisively. A bit rich considering their past moves have led to inflation at 54% and rising. Sure, the rising energy costs they alluded to will contribute to it rising further this year but it's in no way been the key driver. Not that this will influence the central bank's decision-making.

Oil rises after Kremlin comments and IEA report

Oil prices are rising once again today, with Brent and WTI now back above $100. It has been pushing higher throughout the day after the Kremlin pushed back against reports of substantial progress in ceasefire talks. It feels like a real setback just as things appeared to be heading in the right direction which had allowed oil prices to fall considerably from the highs.

Also contributing to the uplift is IEAs assessment of the oil market with Russian exports seen declining by around three million barrels per day. That's far more than the lost demand growth as a result of high prices which further tightens the market. Whether that will be enough to convince certain OPEC+ members to raise output and be less led by Russian assurances is another thing. There's certainly growing support for the group to do more.

Gold downside limited in the current environment

Gold prices are pushing higher for a second day after briefly slipping below $1,900 on Wednesday. A combination of economic concerns, high inflation, and a dip in risk-appetite on the Kremlin comments have contributed to the spike in the yellow metal.

At least two of these aren't going away any time soon and there's nothing predictable about the actions of Vladimir Putin so gold should remain relatively well supported for some time yet. That may not mean we're hitting record highs but it should limit the downside to some extent.

Bitcoin slips near key resistance

Bitcoin is getting hit in risk-averse trade after bouncing back strongly over the last couple of days. It rallied strongly to push back above $40,000 but fell short just shy of $42,000 and is now being dragged lower alongside other risk assets.

Ultimately, what we're seeing here is a continuation of the consolidation we've been seeing in bitcoin for weeks. That could continue for a while longer yet and a break to the upside probably looks more likely than the alternative but as ever in this situation, it's tough to say. A move above last week's highs would be a big step in the right direction.