Hello and welcome to the Key To Markets preview of the Week Ahead.
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5-day performance as of July 22, 2021. 21:00 GMT
                         Source: finviz.com
In case you missed it….
Worst day in 9 months. The Dow Jones led a big decline across US equities on Monday last week- it’s was the worst day for the index since October.
Crude crash. The price of oil saw heavy selling after OPEC+ agreed an oil supply deal, sending WTI crude oil down over $10 pb from its recent peak at $76.
USD 3-month peak. The dollar benefited from the risk-off mood across markets. The dollar index (DXY) built on its rally over the past few weeks to strike a 3-month high.
ECB lower for longer. The European Central Bank used its strategic review to push the message that it would keep interest rates low for a long time across the Eurozone.
Bezos to the moon. Billionaire Amazon-founder Jeff Bezos made it into space (and back) in the first commercial flight of his Blue Origin passenger spacecraft.
Bitcoin fights $30K. Bitcoin fell under the $30k level for the first time in a month but Elon Musk managed to talk it back up again at the ‘B-Word’ online forum.
Netflix and miss! Subscriber growth beat expectations but EPS in Q2 and guidance for Q3 missed, sending the share price lower after results were released.
Revolut worth $35 billion. The UK Digital banking app and startup unicorn is now worth $35 billion following its latest funding round.
2-month recession. In a conclusion that confounded economists as well as the hundreds of thousands still unemployed, the NBER declared the US recession ended in April 2020.
US China trade. The trade war had been a big downside risk across financial markets in 2019 but the new US administration and pandemic have changed all that.
                 Source: Refinitiv / Alastair Williamson
This chart is an interesting way of looking at the relationship between forex and stock markets.
The line in yellow is an index of emerging market (EM) currencies and the blue line is the MSCI ‘All-World’ index for equities.
In the circled area, you can see EM currencies have been falling against a stronger dollar (the buck has been rising since the hawkish Fed shift as we have noted many times). The red dashed line shows how this is a divergence from the performance of stocks, which are still close to their highs.
The correlation between the two has been strong so when it breaks down its worth watching. The earlier phase of dollar strength in Q1 didn’t really faze equities but the previous time EM FX started to really underperform global equities was before the massive sell-off at the start of the pandemic in 2020.
There are two factors at play with the Fed: 1) When they will raise rates 2) Inflation expectations. The dollar has gained since the June meeting on the basis that the Fed will be among the first of the major central banks to raise rates. 10-Year yields however have dropped dramatically because bond investors seem to agree with the Fed that inflation will be transitory so there is no big rush to taper QE.
The consensus is that the Fed continues its hawkish pivot, perhaps even getting more specific on the timeline for tapering bond purchases. A hawkish Fed is naturally positive for the USD but since the dollar has been rising already, the bar is quite high for a hawkish surprise, which could leave the buck susceptible to profit-taking.
The open question heading into the new week is whether we get another bout of ‘Monday Madness’ and a ‘Tuesday turnaround’.
The big unknown is the Delta variant and how governments will respond to it. The best gauge is probably the UK, which is among the countries with the highest Delta covid cases and also among the highest numbers vaccinated. So far, the covid death rate in the UK has been little changed and appears to have diverged from rising cases. If that remains the case, it’s a good signal to markets that they can keep pricing in the economic recovery with higher stocks, though perhaps not a weaker USD.
Apple, Amazon, Alphabet (Google), Microsoft and Facebook all report second-quarter earnings this week.
The earnings results, the guidance from companies and the way investors react to the results will be a benchmark for the rest of earnings season as well as stock market performance for the rest of Q3. The share prices have all been performing well over the past six weeks after a lacklustre start to the year. Netflix, the only FAANG company to have reported results so far, missed expectations but avoided a huge sell-off in the shares.
US GDP growth is expected to reach a stunning 9% in the second quarter. Even if that number missed by 50%, it would be impressive by recent historical standards. But for the market, the number itself is less important than the rate of change (ROC). Investors understand economic growth will slow down the further we move past the initial recovery, the question is how quickly,
Bond markets have been rising (yields falling) in what is usually a sign of fears about economic growth but can also be a sign that inflation fears are ebbing. The trouble is that its hard to read market price signals because the Fed is distorting the market. If the GDP figure comes out strong this week, it suggests falling bond yields are not something to worry about and could soon turnaround.
The Eurozone growth numbers come the week after the July ECB Meeting, which in effect make them less meaningful than they might have been. The ECB have given themselves room to keep monetary policy loose for longer after their policy review. The ECB mandate is specifically about inflation but growth running hot enough to add to inflationary pressures doesn’t mean what it once did for higher interest rates in Europe. As such, any positive reaction in the euro to this news could be an opportunity to sell into the EUR/USD downtrend.
Here you can find analysis of the major asset classes including the major forex pairs, gold, oil, the S&P 500 and Germany’s DAX index.
EUR/USD remains in a downtrend but a possible falling wedge pattern suggests the downtrend could soon reverse. A move above 1.185 might confirm the bullish reversal.
GBP/USD has dropped below 1.37 but quickly reversed higher. New selling opportunities exist above 1.38 and below the 20-day moving average.
USD/JPY is trending lower with lower highs and lowers following a long uptrend. A rise above a falling trendline and the 20 DMA could turn things more bullish.
AUD/USD remains in a steady downtrend with no big signs of versal despite the big move of the lo near 0.73.
USD/CAD has pulled back from above long term resistance. Assuming the uptrend continues, 1.25 is support with 1.243 below.
XAU/USD has major support at the 1800 level. The recent rally could not even make it close to 1850 and suggests another break lower toward yearly lows around 1750.
Brent crude faces possible supply near the 73.0 level as well as a H&S top pattern in a rebound that came after a big move lower.
US500 found support near the rising trendline we mentioned in last weeks’ report. The assumption should be for extra gains until the trend reverses.
Thank you very much for reading – and have a great week trading!
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