Investors wary of inflation trend

Stock markets have turned a little more negative on Wednesday, with Chinese data overnight dealing a blow to sentiment.

It seems there's a growing list of concerns for investors that spans beyond simply what the Fed is going to do. And this comes despite certain Fed officials giving the impression that they are undeterred by this. That may well change over the coming months.

Inflation is at the forefront of those concerns, perhaps why policymakers are so reluctant to wait, which makes it even more of a concern. Investors have been cracking on under the impression that inflation is transitory - as they've repeatedly been told - and tapering will come as a result of the economic recovery rendering it no longer necessary.

Regardless of whether the result is the same, the change in narrative is a worry for investors. Persistent inflation, a slower economic recovery and higher interest rates is not the recipe for stronger equity markets but that appears to be the way we're heading.

Coming at a time when Covid cases are already rising going into the winter period, potentially meaning more restrictions - or at the very least more cautious behaviour - we may be in for a difficult end to the year for risk assets.

Two hikes priced in as UK inflation surges

The UK is among those experiencing a surge in inflation, with the August reading jumping to 3.2%, ahead of market expectations. One of the drivers is the timing of the Eat Out to Help Out scheme last year, which makes it look worse than it is but this also won't be where it peaks, which is why some are growing more concerned.

The result is that traders are now pricing in two rate hikes next year, taking the base rate to 0.5% by year-end. While there are areas of concern as far as inflation is concerned, such as higher input prices and the struggle to fill vacancies with skilled workers, I'm still unconvinced by the stickiness of the inflation we're seeing.

While this won't necessarily deter policymakers from gradually removing emergency stimulus measures, I still think it will be done with great caution and only as the economy warrants it. Still, that doesn't mean it won't be a nervy few months, with inflation expected to peak later in the year.

Oil rising once more after inventory data

Oil prices are rising again on Wednesday, after data from API a day earlier showed a larger drawdown in inventories, once again drawing focus to today's report from EIA. A double whammy of the damaging impact of Hurricane Ida followed so quickly by Hurricane Nicholas slowly making its way across the region has weighed on activity in the Gulf which is also supporting prices.

With a couple more months to go of Hurricane season, prices may remain well supported. The flipside to that may be a slowdown in economic activity, with the Chinese data overnight highlighting the significant costs of outbreaks in the country. OPEC+ is planning to stay the course for now, after revising up its expectations for demand growth next year.

With WTI now firmly back above $70 and Brent closing in on its summer highs, we could see some profit-taking soon, although there aren't yet many signs of this happening. The momentum indicators at worst are flattening off but we're now seeing them slow just yet. Perhaps activity in the Gulf will see oil prices hit new summer highs but momentum will be key to the rally being sustained.

Gold pares gains after US inflation surprise

US inflation data on Tuesday gave gold the boost it needed after consolidating just below $1,800. It quickly ran into resistance though around $1,810 and already today it's giving back some of these hard-fought gains. It seems the recent Fed speak is still echoing in the back of gold traders minds even as the data continues to justify further patience.

The message next week could be very different though, which feeds into the uncertainty we're seeing in the yellow metal. It can be difficult to reconcile when the data and commentary don't align but ultimately, you'd expect to latter to catch up if the trend continues. If it does, gold could really take off and $1,833 could come under real pressure.

Of course, against the backdrop of a debate over the stickiness of inflation, the message coming from the Fed may not change, rather the explanation to justify the moves. As mentioned earlier, this would be far more concerning and could weigh on sentiment in the months ahead.

Bitcoin showing incredible resilience

Bitcoin shows incredible resilience at times and it certainly feels like we're seeing that right now, with the cryptocurrency making gains for a second day and approaching $48,000. This comes despite $44,000 once again coming under pressure earlier this week before bulls fought back once more.

A failure at $48,000 could be another blow though and perhaps a further correction warning. A move above here could spur more optimism and fuel another rally towards $50,000 where it has repeatedly run into resistance.