Throughout last week, investors were unsure or unwilling to commit to a particular direction. In the end, they decided to ramp up their holdings of stocks, while FX traders also reluctantly decided to join the risk-on and reflation trade. The trigger was the official US non-farm jobs report, which came out weaker than expected, despite some of the leading indicators from earlier in the week pointing to a very strong report. The S&P 500 closed at a new record, while in Europe the DAX also hit a new all-time high as investors revised their expectations for policy tightening from the Fed further out.
The week ahead features two major central bank meetings in the form of the BOC and ECB, as well as a handful of potentially market-moving macro data, with US CPI being the highlight (see below). At the start of the week, we have seen some dip buying of stocks as European indices recovered from early weakness to turn positive, sending the DAX to a new record high. US futures were a bit reluctant to add to Friday’s gains as investors weighed the impact of a minimum corporate tax on technology firms. Still, the losses were minimal, and I wouldn’t be surprised if Wall Street rallies when trading resumes later on in the day.
So, we may well see some further upside follow-through in risk buying after the US jobs report revived the reflation trade and caused the dollar to slump on Friday, with investor concerns about inflation and tapering being put on the back burner. The weaker than expected 559K gain in nonfarm jobs growth means the goldilocks scenario for the equity markets have been kept intact. Will this change in the week ahead? I am not so sure. Until the Federal Reserve is more vocal about tapering, investors will be happy to continue buying the dips in stocks and sell the rips in the dollar. The Fed’s next meeting is on 16th
June, which is likely to be the first real test for the markets in months.
Ahead of the Fed meeting next week, there are plenty of macro events to look forward to, including policy decisions from the European Central Bank and Bank of Canada this week, with US CPI being the main data highlight. If we see another sharper-than-expected pickup in CPI on Thursday, this could hurt risk appetite somewhat as it may lead to speculation over tapering.
Here’s what’s on tap for the next 5 days of the new week:
- German Factory Orders -0.2% m/m vs. +0.4% expected; Sentix Investor Confidence for Eurozone rose to 28.1 from 21.0, higher than expected
- Apple WWDC
- German Industrial Production and revised Eurozone GDP
- Chinese CPI
- Bank of Canada policy decision and press conference
- European Central Bank policy decision and press conference
- US CPI and jobless claims
Chart to watch: Nasdaq 100
- UK GDP, construction output and manufacturing production
- US UoM Consumer Sentiment and Inflation Expectations
With inflation concerns receding somewhat, the Nasdaq could be about to pop higher, especially as the index is testing key short-term support around the 13700 area:
Source: ThinkMarkets and TradingView.com
If the above support level holds, we may see a breakout to a new all-time high. Interim resistance is se around 13780, which has capped the highs on a few occasions last week.