Risk aversion has been pressuring the markets lately. All eleven S&P 500 sectors finished in the red yesterday with the financials (-2.00%) leading the rest. Market participants are worried about the impact of tighter central bank policies and the fast-spreading Delta variant. Yesterday we pointed out how commodity currencies and USDJPY were suffering from this. Earlier this week we pointed out how there was weakness in the Dow Jones Industrial Average. Now we are seeing more weakness the US equity indices and equities around the globe have lost ground in the face of higher financing conditions and increasing covid-19 infections. By reading further you agree with our disclaimer at the end of this report and acknowledge that we do not provide investment advice.
There used to be a saying that when the US sneezes the rest of the world will get a cold. The growth of China as an economic powerhouse has changed this dynamic to a certain degree but when it comes to stock markets the saying is still quite accurate. By the time there is early weakness in the US equity indices the rest of the world is already seeing substantial selling in their stock markets. Reasons for this market behaviour are related to liquidity issues and fund managers’ psychology. Yesterday the DJIA fell 0.7% and the S&P 500 0.86% while Dax (-1.75%), EuroStoxx (-2.35%) and FTSE 100 (-1.63%) all traded significantly lower. Hang Seng dropped 2.89% in yesterday’s trading.
When there is weakness in equities the money has to flow somewhere else, e.g. bonds. US Treasury yields dropped once again as investors moved their money around from stocks to bonds. At the lowest point yesterday the 10-year note yielded 1.246%. As a comparison, the yield was as high as 1.7460% on March 31st this year. Gold futures (-0.11%) rallied as yields moved lower intraday but then yields started to rise and gold sold off leaving the close below the open. This created a bearish shooting star candle. Silver futures, being more volatile closed down by -0.54%.
WTI Crude futures (-1.02%) spiked lower intraday but then closed higher giving a bullish indication for today’s trading. This was helped by crude oil inventories coming in at lower levels than projected by the analyst consensus (-6.9M, -4.0M expected). Unemployment claims from the US were a disappointment with 373K new claims (345K expected). Today’s key risk events are BOE Governor Bailey’s speech and Canadian employment data releases.
Macro Drivers for the USD
As the most followed, invested and traded markets for risky assets are priced in the USD it is helpful to understand what macroeconomic factors impact the other side of the equation, the USD. Whether we are trading EURUSD, XAUUSD or US equity CFDs the factors impacting the dollar, the nominator in the equation, have a significant role in the formation of all medium to long-term price action. The following table summarises the most important fundamentals.
|The FED||The Fed has now changed the tune and is moving away from the ultra-accommodative monetary policy. Currently, the expectation is that the first-rate hike would take place in the second quarter of 2022.|
|Stimulus||The US lawmakers have authorised approximately five trillion dollars of economic stimulus and the Biden administration is negotiating with the Senate Republicans to introduce a $1.2 trillion infrastructure stimulus plan.|
|Yields||After trending higher since the beginning of August 2020, the Treasury yields have been moving lower since March 2021. All in all, the yields and interest rates are extremely low on both nominal and real basis.|
|Employment||Even though the June NFP report came in better than anticipated (+850K) the total is still 6.8 million jobs lower than at its peak in February last year. However, the Fed has said earlier recently that believes that the US is on a path to a very strong labour market as indicators of activity and employment continue to improve.|
|Inflation||The year on year headline CPI change was 5% but not all inflation gauges agree with such a high number. The trimmed-mean inflation CPI index published by the Cleveland branch of the Federal Reserve Bank, rose only 2.6% y/y (0.4% m/m)|
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Market News & Facts
- UK GDP m/m +0.8% (1.5% expected)
- Record high coronavirus cases in South Korea
- Sidney stays in lockdown as cases increase
- Analyst consensus: BOC to taper by 1 bn CAD next week
- Chinese CPI 1.1% y/y (1.3% expected)
- ECB inflation target to 2%
- PBOC $23 billion intervention to buy USD against yuan
- The US JOLTS job openings for June 9.209M (9.310M expected)
- Japan’s extra stimulus estimated at $180 bn
- Westpac forecasts RBNZ will hike rates in November
- US ISM Services PMI for June 60.1 (63.5 expected)
- UK construction PMI for June: 66.3 (64.2 previous)
- PBOC: warns against institutions providing cryptocurrency services
- RBA’s Lowe is not considering rate increases in 2023
- The UK Prime Minister lifts Covid restrictions
- OPEC+ meeting postponed
- Central banks reportedly buying gold, moving out of the USD
- China June Caixin/Markit Services PMI 50.3 (55.7 expected)
- ANZ Australian Job Ads for June +3.0% m/m
- Australia to limit international arrivals by 50% due to the Delta strain
- Philadelphia Fed’s Harker: tapering should start later this year
- BOE ready to respond to signs of persistent inflation
The Next Main Risk Events
- EUR – ECB Presiden Lagarde’s Speech
- GBP – BOE Governor Bailey’s Speech
- USOIL – OPEC JMMC Meetings
- CAD – Employment Change
- CAD – Unemployment Rate
For more information and details see the TIOmarkets economic calendar here.
Chief Market Analyst
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