After last week’s falls, European indices and US index futures bounced back noticeably and were hitting new session highs at the time of writing at midday in London. Energy stocks were leading the gains, as crude oil reached a six-week high. Short-covering probably aided the rally in what is a data-void first day of the week.
The German DAX was up a cool 1.4%, leading the charge in Europe. In FX, the dollar rose, while the euro slipped, along with safe-havens Swiss Franc and Japanese yen. Gold and cryptocurrencies fell further. Crude oil was up sharply again, after a record production slump in the US – due to adverse weather – more than offset China’s decision to release crude from its strategic reserves.
It is worth observing price action closely this week. Given last week’s falls for major indices, it could be that today’s stronger start could be faded later in the day or week, as trapped bulls exit their trades or fresh selling takes places at better levels.
Sentiment has not been too great of late. Stagflation has been the key talking point amid weakening data from the US and rising inflationary pressures. Indeed, the Citi US Economic Surprise index has been falling consistently and has now reached its the lowest since June 2020.
Although the economic calendar is quite quiet today, we have seen oil prices rising further with WTI closing in on $71 handle, and aluminium hitting its highest level in 13 years. These only add to rising input costs, potentially leading to further consumer inflation as producers pass on the extra costs.
Inflation concerns will remain in focus this week, with US CPI out on Tuesday. Depending on the outcome of this, traders’ expectations about the timing of stimulus withdrawal will be adjusted again, potentially leading to some volatility.
The main worry is about growth now. Record stimulus measures are continuing to keep the economy ticking over, but the pace of growth seems to have slowed down. This comes at a time the Fed is about to potentially reduce its purchases. For other central banks that are still very dovish, it is not easy to vastly expand QE from current levels. Likewise for many governments, further big fiscal stimulus measures are almost impossible given their record borrowing during the height of the pandemic.
So, going forward, the risks for stocks and probably some other risk-sensitive markets are likely to be skewed to the downside.
Whether we will see renewed weakness come into the markets this particular week remains to be seen. But the week ahead does feature some important data. We will get the latest CPI and retail sales reports from the US and UK, as well as some market moving data from the likes of China (retail sales and industrial production), Australia (employment report) and New Zealand (GDP). FX traders should be kept busy. See the macroeconomic highlights below.
Incoming data releases will be scrutinised closely going forward. After a long time, the FX markets are once again becoming data dependant as investors are trying to figure out which central bank is comparatively becoming more hawkish as life continues to slowly turn back to normalcy.