Sentiment towards risk assets remained supported on both sides of the pond this week, with stocks in Europe doing particularly well. For the first time ever, the DAX breached 16,000 on Friday as investors continued to pour into European names, while the ongoing rally on Wall Street showed no signs of abating either. Investors have continued to dismiss concerns over delta variant of covid, inflation, as well as valuation worries and other risks. The latest price indicators pointed to further pickup in inflation. Although US CPI was in line, PPI came in well ahead of expectations, while house and rent prices continued to ascend and container shipping rates surged further higher. Crude oil prices rebounded despite oil agencies lowering their demand projections. Yet, none of these risks have been big enough to cause sentiment to turn sour towards stocks, even if it means we are now a lot closer to the start of asset purchases reduction by the Federal Reserve.
Given the sharp rally for global equities, I reckon we will see further follow-through in bullish momentum in the early parts of next week. There is the potential for some of the underperforming European equity benchmarks such as the FTSE and Ibex to play catch up with the racier indices such as the DAX and S&P 500. Investor sentiment will remain overall positive for as long as central banks have their backs. The Fed still thinks that price pressures are temporary and that it will not tighten its belt too fast and too tight to cause a slowdown in the recovery. Similarly, the likes of the ECB, BoE and BoJ are all keeping their respective asset purchases programmes at full throttle for now.
But compared to the ECB and BoJ, the Fed appears to be less dovish and on the verge of potentially reducing its QE purchases. This means, the USD/JPY is likely to remain supported while the EUR/USD could break below 1.17 support. As things stand, the only factor that could support the single currency would be foreign demand to purchase European stocks. In fact, I reckon this is one of the biggest reasons why we are not at $1.15 already.
Overall, though, expect FX volatility to remain subdued as the week ahead only feature a handful of potentially market-moving catalysts, with the summer months usually not providing much movements in any case. But the Reserve Bank of New Zealand could change that at least for the New Zealand dollar. The RBNZ is set to become the first major central bank to hike interest rates on Wednesday. It is seen hiking by 25 basis points to lift the OCR to 0.5%, with the potential for at least one more hike before the end of the year. But this outcome is likely to have been priced in. To the extent the NZD will move on the back of the RBNZ will depend on the central bank’s forward guidance. All told, the NZD should benefit from a hawkish RBNZ for the rest of the year, meaning it could outperform some of the other major currencies, or at the least the downside is going to be limited.
As far as precious metals are concerned, well they tried to put up a fight after flash crashing earlier in the week. But traders were happy to sit on the offer as the relative strength of the dollar and the rallying stock market, not to mention a small rebound for yields, weighed on prices. However, if the dollar rally stalls in the week ahead, we could see the metals rebound given the ongoing central bank support and low yields. Investors may also be keen to buy gold at relatively cheaper levels to hedge against inflation.
Meanwhile it is worth keeping a close eye on oil prices. Although they stabilised somewhat this week, several oil agencies such as the International Energy Agency and OPEC have lowered their global oil demand outlook. This is due to the spread of the delta variant causing more restrictions in several oil-consuming Asian countries. So, there is a risk prices could weaken in the week ahead.
Economic calendar highlights
- Japan GDP and industrial production
- China industrial production, retail sales and unemployment rate
- UK average earnings index, jobless claims and unemployment rate
- US retail sales and industrial production
- Fed chair Jay Powell speech
- RBNZ – rate hike expected
- CPI estimates from UK and Canada
- US building permits and housing starts and FOMC minutes
- Australia employment
- Unemployment Claims and Philly Fed manufacturing index
- Retail sales from UK and Canada
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