As another month draws to a close, investors’ insatiable appetite for risk remains overall intact with the world market set to rise for the 6th consecutive month. However, this last week of the month was a mixed one for global stocks, while in FX, the pound, euro and gold all took advantage of weakness in US dollar, with the metal finding additional support from falling benchmark bond yields. US technology sector initially rallied on the back of dovish Fed Chair Jay Powell and solid earnings from the likes of Apple, Microsoft and Google, but slowing growth from Amazon and risks from China’s regulatory crackdown, as well as rising delta cases around the world, all weighed on sentiment later in the week. Unsurprisingly, Chinese markets fared the worst, while Europe traded mixed.
Investors are torn between continued support from the Fed and other major central banks and signs of slowing economic growth with Covid-19 and variants of the disease proving to be more stubborn than had been expected. Australia, Japan and many other Asian countries had to introduce fresh restrictions, while rising cases in the US is starting to raise some alarm bells. Still, the markets once again continued to look at the positives, with the S&P and Nasdaq hitting fresh records earlier in the week, while crude oil prices remained elevated as falling US crude stockpiles eased concerns over rising supplies from the OPEC and a potential slowdown in demand.
Earnings focus shifts to Europe and away from US
For equities, the focus will shift away from US earnings, but there will be plenty of big names reporting their results in Europe (see calendar below). We have seen some decent result from the likes of Anglo American, Shell, Boeing and many others, adding to the positivity from Wall Street where technology giants (excluding Amazon) have absolutely smashed forecasts. The overall positive reporting season has provided fresh impetus for the major European indices after the recent falls in Chinese markets had started to hurt sentiment here. If the trend continues in the week ahead, then expect to see more gains for the European indices.
But will the stock markets in the US continue to defy gravity or follow Chinese markets and correct themselves in the weeks ahead? With the reporting season in the US out of the way and valuations at sky-high, the only thing holding the markets up is the Fed’s continued support in the form of ultra-easy monetary policy. So, while it wouldn’t take much for risk appetite to turn sour, any potential sell-off is likely to be short-lived given the Fed’s ongoing support. This is despite the fact that core CPI estimate has surged to +4.5%.
US employment key focal point
The Fed Chair Jerome Powell has confirmed the central bank is moving closer to when they can start reducing bond purchases from the current pace of $120 billion a month. The Fed wants to see “substantial further progress” in employment, which makes Friday’s non-farm jobs report very important. After last month’s stronger-than-expected 850K print, analyst expect to see further improvement: 925K on the headline. They expect the unemployment rate to have fallen to 5.6% from 5.9% and average hourly earnings to have climbed by another 0.3% on the month. Given that jobless claims have been on the rise or have come in worse than expectations for the last 7 out of the past 8 weeks, there is a risk that nonfarm employment data may disappoint on Friday. If so, this should apply a bit further pressure on the dollar, keeping gold and silver supported. We will also have the ISM PMIs and ADP payrolls report all to look forward to from the US earlier in the week.
RBA likely to remain dovish but what about BoE?
BoE: The UK economy has been growing strongly in recent months as lockdown measures eased thanks to the rapid pace of vaccinations and previous lockdown helping to stem the spread of the virus. Although the delta variant has since been spreading rapidly, before falling back in more recent days, this has unlikely to have hurt economic activity as all legal limits have been lifted for England. As a result, the Bank of England has become increasingly vocal about tapering QE, and the pound has responded by rising across the board. BoE’s Michael Saunders recently said that it "may become appropriate fairly soon to withdraw some stimulus." Saunders said that would be appropriate so long as economic activity and inflation indicators remain in line with recent trends, and downside risks to growth and inflation do not rise significantly. The hawkish comments from Saunders and those from Ramsden before have led to some speculation that the August MPC meeting could be a live one. However, I don’t think the BoE will move that soon to end asset purchases, but it could nevertheless prepare the market for tapering in the months ahead.
RBA: Could the Reserve Bank of Australia do a U-turn on QE? At its last meeting in July, the RBA said it was on target to reduce its quantitative easing programme as the economy was expanding at a healthy pace and unemployment was falling faster than anticipated. However, things have turned unfavourable over the past month or so as lockdowns in several big cities were extended, with Sydney expected to remain shut until end of August as Covid infections continue to rise in the nation's largest city. Some speculate that the RBA may even expand QE again at its meeting.
Economic and earnings highlights
- Global Manufacturing PMIs – Flash estimates from China (Caixin), Spain, Italy and US (ISM); final versions from Eurozone and UK
- Retail Sales from Germany and Switzerland; US Construction Spending
- Earnings: HSBC, Heineken
- RBA rate statement
- Earnings: BP, Societe Generale, Standard Chartered, Fresnillo, Domino’s Pizza; Alibaba
- New Zealand Employment change
- Australia retail sales
- Global Services PMIs – Flash estimates from China (Caixin), Spain, Italy and US (ISM); final versions from Eurozone and UK
- US ADP employment report
- Earnings: Legal & General, Taylor Wimpey and General Motors
- Bank of England policy decision
- German Factory Orders, UK Construction PMI, and US Unemployment Claims
- Earnings: Glencore, WPP, Rolls-Royce Holdings, British Land, Credit Agricole
- German Industrial Production
- US non-farm jobs report
- Canadian employment report
- Earnings: ING, LSE
Featured Chart: GBP/USD
After breaking above old highs and resistance around 1.3900/10, this area will need to be defended if the short-term bullish bias remains intact. If the buyers hold their ground here, then it will likely pave the way for 1.40 next. However, failure to do so would be a bearish development.
Source: ThinkMarkets and TradingView.com
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