Risk appetite remains strong heading into the US session and ahead of the weekend. Stocks have hit repeated new record highs in the US and Germany, while the US dollar and bond yields have eased noticeably too, reducing the opportunity cost of holding non-interest-bearing assets like gold and silver. The greenback has weakened against all major currencies with emerging market currencies and commodity dollars performing the best amid ongoing risk rally. The reflation trade has also caused crude oil and copper prices to rally.
What’s causing this big risk rally?
- Growing signs of economic recovery: In the US we have had lots of good data in the last couple of weeks, including a solid non-farm payrolls report, stronger CPI data and blowout retail sales figure. Still, bond yields failed to respond in the way you would expect and instead they have fallen, pushing the dollar down and gold up. Meanwhile, the pace of vaccinations has finally picked up in the Eurozone, which should hopefully push down the infection rates there and lead to easing of lockdowns. Also helping to boost sentiment was news from the world’s second largest economy as Chine recorded 18.3% q/y jump in GDP and 32.4% y/y rise in retail sales.
- Bank earnings have all topped expectations. Morgan Stanley was the last of the major lenders to report its numbers on Friday and judging by the results of other banks it will likely beat expectations too. If bank earnings are anything to go by, then this reporting season could be a big one for other sectors too. We have plenty of more earnings coming up in the week ahead – see the economic and earnings calendar highlights section, below.
- Inflation not a concern: The market’s recent reaction implies investors are not very concerned about short-term strength in US data or inflation, after all. Most investors seem happy that the world’s largest economies are rebounding nicely, and central banks are maintaining their QE purchases programmes, fuelling the reflation trade. We are witnessing similar price action to when everything bottomed out in March 2020, as stocks, cryptos, gold, silver, copper and foreign currencies all surged higher.
In the weeks ahead, the theme is likely to be a repeat of this week: long everything versus the dollar and buy the dips in the stock markets. This trend will only change when investors no longer think that the rise in inflation is going to be transitory or we see central bank heads change their tones noticeably about their respective monetary policy stances. For this to happen we need to see evidence of inflation rising more profoundly, which could encourage investors to start betting about a quicker tightening of monetary policy than expected, like we have seen in the Chinese markets where equities have struggled noticeably of late.
For now, the Federal Reserve Chairman Jerome Powell like other major central bank chiefs have made it clear that even though he’s optimistic on the economy, the rise in inflation is likely to be transitory. This message is likely to be echoed by Christine Lagarde at the ECB’s press conference on Thursday.
Therefore, any short-term dips we may see for risk assets in the coming weeks should be treated as retracements than a complete trend reversal, until such a time the markets create distinct reversal patterns like major lower lows etc.
Economic and earnings highlights
The economic calendar for the week ahead is a busy one with lots of macro data and a couple of central bank meetings to look forward to. The earnings calendar is jam packed. Here are the highlights:
- No major data
- Earnings: IBM, Coca-Cola and Petrofac
- Data: U.K. Average Earnings Index and Jobless Claims
- Earnings: Netflix, Johnson & Johnson, PG, Danone and Associated British Foods
- Data: CPI estimates from NZ, UK and Canada; Aussie retail sales and US crude oil inventories
- Bank of Canada policy decision and speech by BoE Governor Bailey
- Earnings: Verizon Communications and Carrefour
- Data: US jobless claims
- European Central Bank meeting and press conference
- Earnings: Intel, AT&T, Snap, American Airlines, Renault and Taylor Wimpy
- Data: Flash manufacturing and services PMIs from Eurozone, UK and US; U.K. retail sales
- Earnings: Royal Caribbean Cruises, Honeywell International
Chart to watch: GBP/USD
With the release of UK wages and jobs data at the start of the week and manufacturing and retail sales at the end of the week, the pound is going to be among the major currencies to watch in the week ahead. The pound has struggled in recent weeks, held back in part because the EUR/GBP rallied on the back of a pickup in Eurozone vaccinations. But with the US dollar selling off across the board, the GBP/USD could be about to stage a breakout from THIS bull flag pattern:
Source: ThinkMarkets and TradingView.com
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