This week has very much been a to and fro between whether the US Federal Reserve are about to pivot and adopt a more dovish monetary policy stance, or perhaps less tightening stance would be a more appropriate way to put it. Investors are therefore focussing on every scrap of economic data which they can get their hands on. We appear to be back to an environment where good news is bad news and bad news is good news. When data is softer than expected we are seeing equity indices and bond prices rally, whereas when it is stronger than expected we see the opposite.

It was the Reserve Bank of Australia who put the cat amongst the pigeon earlier this week. They had been expected to raise interest rates by 0.5% but instead went for a smaller 0.25% hike. This caught the market by surprise and we saw a sharp fall in Australian government bond yields. The yield on the three year bond for example fell to a little over 3% having traded at almost 3.8% in earlier sessions.

The more dovish tack led investors to believe that the Fed could do the same, but comments from committee members later in the week appear to have extinguished this for now. One member was quoted as saying “I anticipate cracks in US financial markets, but the bar for a change in Fed policy in response in response is very high.” Another member meanwhile believes that “rate hikes of 125 basis points are expected over the next two meetings.” If we were to see that latter, with 75 basis points in November and 50 basis points in December, this would represent the fastest tightening cycle seen over the last 30 years, where we have seen, including this one, five hiking cycles.

As central banks battle to bring inflation under control others conspire to work against them. OPEC+ this week, much to the annoyance of the US in particular, who had been running down their strategic oil reserves to support the lack of supply given the sanctions placed on that from Russia. The organisation have agreed to cut daily oil production by two million barrels, equal to 2% of global production. OPEC+ argued that the cut was needed due to weakening global growth. This unsurprisingly pushed the oil price higher at a time when we already have high energy costs.

Finally we can’t end this week without mentioning events surrounding Credit Suisse. A lack of investor confidence grew in the bank last weekend and continued throughout the week. This has seen credit default swaps, which protect against a default on their bonds issued, rise to a level which eclipses that seen in the global financial crisis. Contagion has been seen in some other European banks, such as Deutsche Bank in particular, and others such as UBS, but not to the extent as that seen in Credit Suisse. The bank have committed to buy back its own debt to the tune of $3bn and remain convinced that their balance sheet is strong.

As liquidity continues to tighten across the world we suspect that other cracks may appear. UK pension schemes last week, banks this week, who will be next week?

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