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Week Ahead Preview: 21 June 2021

Fawad Razaqzada Fawad Razaqzada 18/06/2021
Week Ahead Preview: 21 June 2021 Week Ahead Preview: 21 June 2021
Week Ahead Preview: 21 June 2021 Fawad Razaqzada
After weeks of waiting, the markets were treated with a surprise as the Federal Reserve turned out to be more hawkish than anticipated in mid-week, causing sharp moves in the markets. FOMC projections indicated the Fed was preparing for earlier interest-rate increases. This helped to rein in speculation that price pressures could get out of hand, causing yields to dip back a little. Stock market investors evidently unwound some of this year’s dominant reflation trades as commodities extended a slump, choosing instead to go back into growth stocks. Consequently, the Nasdaq 100 hit a fresh record on Thursday, while other US indices struggled. FX traders dumped foreign currencies and bought the dollar, resulting in a sharp rally for the Dollar Index. The Fed’s decision also weighed heavily on gold and silver, as well as other buck-denominated commodities. On Friday, when this report was written, it was turning into a bit of a black Friday for risk assets in what looks like a mini taper tantrum. Already lower on the day, stocks losses accelerated after the Fed's Bullard admitted that "it is natural we have tilted a little bit more hawkish." Investors fear that with inflation rising rapidly, QE might be tapered sooner than expected.  With the weekend approaching and given the lack of any bullish news flow, investors were not in any mood to buy this latest dip, this late in the day. So, it looked like we might end Friday sharply lower, with futures likely to gap lower at the Asian open on Monday.

 
 
Looking ahead
 
In the week ahead, there might be some further follow-through in terms of the post Fed-reaction. So, it is possible we may see further weakness for value stocks as investors believe the Fed will keep inflation in check by tightening its policy. Technology stocks were preferred this week, presumably because investors believe that the economy will continue to outperform in the months ahead, even if it eventually means higher interest rates. But this argument doesn’t seem quite right to me. I would be wary of a sharp drop for the tech sector, should bond yields start moving higher again. Given the sharp dollar rally, I wouldn’t bet against rising US yields. So, it is possible the tech rally my fade if US yields rebound.
 
However, one counter argument against rising yields are the falling commodity prices, weighing on inflationary expectations.
 
Will commodities slump continue?
 
Indeed, it is worth keeping a close eye on commodities and other markets that have benefitted from the reopening, all seeing a pullback amid the rebounding US dollar and as supply bottlenecks ease. Copper was on track to end its worst week in 2021, while gold and silver were also some of the standout losers. Crude oil has not been immune to a rebounding dollar either. The fact that several other commodities have also weakened means sentiment towards the sector has turned negative, hurting crude oil in the process. If oil’s weakness is sustained, this could have ramifications elsewhere too. The S&P energy sector (XLE), which has been this year's best performer, fell sharply this week and we may see further weakness in early next week. As a result, it could weigh heavily on the benchmark S&P 500 index. The likes of the Canadian dollar and Norwegian Krone could also suffer, given their reliance on energy exports. It is not just the metals and oil, but soft commodities have also fallen sharply, with some such as soybeans wiping out their entire 2021 gains. Corn and wheat have also fallen sharply, along with sugar and lumber prices. With the trend turning bearish, I wouldn’t be surprised to see at least some downside follow-through in the early parts of next week – and maybe longer. But the downside is likely to be limited because of expectations of stronger demand as global economies re-open.
 
Macroeconomic highlights
 
The week ahead features a handful of market moving events, which include the publication of global PMIs, the Bank of England’s policy announcement and the Fed’s preferred measure of inflation.


Monday
  • Aussie Retail Sales
  • Central bank speech: ECB President Lagarde and FOMC’s Williams
As per above, Monday’s price action might be dominated by the after-shocks from the Fed’s hawkish policy meeting, meaning we could see further strength for the dollar and weakness for commodities and indices.


Tuesday
 
  • US existing home sales
  • Central bank speech: Fed Chair Powell testifies and FOMC’s Daly speaks
Tuesday’s macro calendar is quiet, so don’t expect to see much volatility in FX.

Wednesday
 
  • Global flash services and manufacturing PMIs
  • Canadian retail sales and US new home sales
The Eurozone PMIs will be monitored closely as they will provide a good indication about the health of the consumer and the impact of the latest easing of lockdown measures.  Could the euro finally find its feet after dropping below $1.19 in response to a hawkish Fed? It will have a chance if the Eurozone data comes in much stronger.


Thursday
 
  • Bank of England policy decision
  • US final GDP, unemployment claims
  • Central bank speech: FOMC’s Bostic and Williams
Fears that the Bank of England might also turn hawkish has weighed on the FTSE and supported some pound crosses, such as the GBP/NZD, although the GBP/USD has been undermined by the rallying dollar and GBP/JPY by the strength of safe haven Japanese yen. If the BoE signals tightening then expect the pound to gain further strength. However, if the UK central bank turns out to be more dovish than expected then, all else being equal, this should provide support to the FTSE.


Friday
 
  • US Core PCE Price Index, personal income and spending and UoM’s inflation expectations index
 
On the last day of the week, we will have more inflation data to look forward to, including the Fed’s favourite: the core PCE price index. If this shows accelerating prices then this will only boost tapering speculation further, now that the Fed has started talking about, talking about tapering. If so, it could provide the dollar with renewed strength and may be bad news for stocks.
Any opinions, news, research, analyses, prices or other information contained on this website is provided as general market commentary and does not constitute investment advice. ThinkMarkets will not accept liability for any loss or damage including, without limitation, to any loss of profit which may arise directly or indirectly from use of or reliance on such information.
Any opinions, news, research, analyses, prices or other information contained on this website is provided as general market commentary and does not constitute investment advice. ThinkMarkets will not accept liability for any loss or damage including, without limitation, to any loss of profit which may arise directly or indirectly from use of or reliance on such information.
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