- European stocks turn positive after a slow start
- OPEC+ deal or no deal as prices hold above $75?
- Macro highlights this week includes RBA, FOMC minutes and Canadian jobs
European indices higher
European indices turned positive after a weaker open in what has so far been a quiet day for the markets, with the US closed in observance of Independence Day. Final PMIs from the Eurozone and UK were revised higher, as the latest flash readings from Spain and Italy beat expectations. These figures helped to keep the pound and euro supported against the dollar, after the greenback slipped in the aftermath of the US jobs report on Friday. Although the nonfarm payrolls report beat expectations with an 850K headline print on Friday, the fact that the unemployment rate rose while the wage growth slowed meant the report was not as inflationary as some had feared. The dollar bulls were also looking for any excuse to trim their positions ahead of a long weekend break, but the fact that wages didn’t rise as fast as some had feared this helped to keep the goldilocks scenario intact for stocks. Buck-denominated gold and silver found some love as they both closed the week higher on Friday, after they had off sharply in response to the Fed’s hawkish policy decision in June. The positive reaction from gold suggests investors were relieved that wages didn’t rise more than expected which will give the Fed more time to keep their current policy stance intact. So, gold’s move higher was as much a relief rally as anything else.
OPEC+ deal or no deal?
Source: ThinkMarkets and TradingView.com
At the start of this new week, the focus remains firmly fixated on OPEC+ and crude oil prices, after the cartel could not find an agreement due to disagreement between the United Arab Emirates and the rest of the group. Oil prices continued to rise with WTI holding above $75 and Brent $76 per barrel as investors figured that if the cartel fails to find a new plan, their existing agreement will remain in force, which will only see a gradual return of withheld oil supply. The UAE is demanding better terms for itself and has blocked proposals that has been back by the rest of the group that calls for an increase in production over the next few months, while simultaneously extending the broad agreement until the end of 2022, in order to help keep prices stable. But as more cracks begin to appear in the unity between Riyadh and Abu Dhabi, it will be interesting to see what, if any, solutions will be found to end the standoff and how this will shape the market in the next 1.5 years.
What’s driving the markets?
Sentiment towards risk remains positive as we enter the second half of the year after a positive end to Q2. The S&P 500 and other US indices hit repeated new all-time highs, with investors happy to buy every dip in the markets. The acceleration of Covid vaccinations around the world, together with ongoing central bank stimulus, is helping to fuel strong growth. The markets remain convinced that inflation will not accelerate to uncomfortably high levels. Central banks such as the Fed have repeatedly pointed to higher price levels as a result of supply chain disruptions and other temporary factors. Elsewhere, the markets have been more subdued, most notably in China. European markets huffed and puffed last week but showed little conviction as the rising cases of the delta variant of Covid kept the upside limited, while the ECB’s continued dovish rhetoric kept the bears at bay. At the start of this week, it looks like the bulls are back in control as they focus more on the success story of vaccinations than concerns over delta.
For FX, it remains to be seen whether the dollar has any further legs to run higher or will the reflation trade causes it to reverse. The trend for the dollar was positive in June after the FOMC’s hawkish dot plots made the Fed to appear less dovish than other central banks, and as policy makers become more vocal about tapering QE. Stock market investors know full well that it will still be a couple of months at least until the Fed starts reducing the pace of its asset purchase programme. Even then, the US and other global central banks would still be keeping their respective monetary policies very loose.
Macroeconomic highlights
Tuesday: RBA like to reduce emergency stimulus slightly
As the focus turns to tapering, up next is the Reserve Bank of Australia which will decide whether to reduce some of its emergency stimulus given the strength of the economic recovery – although the outbreak of the delta variant of Covid-19 means the RBA will be cautious. Many economists expect the RBA to make small alterations to its QE and yield curve targeting policy. Among other measures, the central bank is expected not to extend the yield target bond to November 2024 as the economy has recovered stronger than expected. However, if the RBA turns out to be more hawkish than expected, then this will surely send the AUD/USD surging higher. Rates have been contained inside a narrow range between 0.75 to 0.80 since the start of the year, after a sharp recovery from the pandemic drop in March. If ranges continue to dominate as we move deeper into Q3, then I would expect a return to 0.80 because were very close to the lower bound of the above range.
Wednesday: FOMC minutes to reveal division?
The key data highlight on Wednesday is the publication of the FOMC’s last meeting minutes in June. The key area of focus will be on how far divisions among members have widened on the tapering time line. The wider the difference, the more likely we will see a notable change in the Fed’s policy in the coming months. The dollar bulls will want to see increased calls for tapering QE and sooner, while the bears would be hoping to see lots of “transitory” or similar words describing inflation.
Thursday: ECB minutes
The European Central Bank remains one of the most dovish central banks out there and the meeting minutes from its June 10 meeting will likely echo that sentiment. Any notable changes from this rhetoric could be positive for the euro and potentially bearish for the EU stock markets – unlikely in our opinion.
Friday: G20 meetings, UK GDP and Canadian employment
G20 meetings: Any discussion on the ongoing OECD negotiations on reforming the global corporate tax system will be the thing that will matter to the markets the most. Some 130 countries and jurisdictions have now backed the proposals. Among other things, this means global companies like Apple and Facebook will be forced to pay more taxes in the jurisdictions they operate in. So far, the tech sector has not been impacted too badly by this, but let’s see if that changes when company CEOs start talking about the impact of higher taxes on their bottom lines when the reporting season gets underway from next week.
UK data: GDP is expected to have grown by 1.9% month-on-month in May compared to 2.3% in April. The success of England’s football in the Euros means the pubs and restaurants in particular have probably supported the economy further in more recent times. Thus, if we see weakness in backward-looking UK data on Friday it will most likely be shrugged off by FX markets, particularly as the remaining Covid restrictions are likely to end in a couple of weeks’ time.
Canada jobs: +40K expected vs -668K last, but there is the potential for disappointment given the re-introduction of some Covid rules in April. These measures have once again eased, but their impact will likely show in the July data.
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