The European stock markets have started the new week on the back foot as rising cases of Delta variant of Covid-19 has provided headwinds for airlines and some stocks in the hospitality sector. It remains to be seen if this will unravel the multi-week rally or provide just a pause ahead of more gains for the markets of stocks. The way the markets have behaving of late wouldn’t surprise me if it is the latter. Investors have bought every single dip so far on ongoing recovery optimism and more to the point, central bank support. Despite some concerns over inflation and massive debt levels, central banks are happy to kick the can down the road and continue to expand their balance sheets. Freshly-created money thus continues to find its way in all sorts of asset classes, with equities remaining the preferred choice due to their higher yields.
Indeed, last week saw the US stock markets more than make up their losses from the week before, when the Federal Reserve had caused a mini taper tantrum with their hawkish-leaning policy decision in which policymakers signalled a reduction in the pace of asset purchases in the months ahead with an improving economy. However, the Fed and other central banks such as the Bank of England re-assured investors last week that monetary policy will not be tightened prematurely and in any case until there is significant further progress is made in the economy. This was music to the ears of the stock market bulls as it kept the goldilocks scenario intact. The US dollar fell back against the more risk-sensitive commodity dollars and emerging market currencies, although it rose against the safe-haven Japanese yen. Metal prices stabilised, led by copper, as the greenback weakened, with gold and silver also eking out gains.
So, despite a weaker start on Monday, sentiment is overall positive in these last few days of the month and quarter. Buying-the-dip is likely to remain the trade of choice in the equity markets, as despite rising inflationary pressures, central banks are still keen to keep their record stimulus measures in place for the time being. This message is likely to be echoed by a handful of central bank officials scheduled to speak. On Wednesday, we might see some volatility as money managers rebalance their portfolios ahead of the third quarter.
NFP key risk event
With the Fed being data-dependant now, speculation about the future of US monetary policy will continue as we have a few very important macro pointers from the world’s largest economy to look forward to, starting from around the middle of the week (see below). Chief among them will be the monthly non-farm jobs report on Friday. After a couple of disappointing readings, will we see a big rebound this time? Analysts expect a 600K reading, which would be a little higher than the May print. However, average hourly earnings have beaten expectations in the previous two months and another sharp rise could re-ignite inflation concerns.
OPEC+ meeting eyed
Also stoking inflation concerns are rallying oil prices with Brent touching $76 and WTI $74 a barrel, their best levels since October 2018. Rising oil prices are particularly bad for consumer nations such as India where fuel prices have jumped to record highs thanks to heavy local taxes and high crude prices. If prices remain this high, this will eat into consumers’ disposable incomes and potentially choke economic growth, which, over time, will weigh on crude prices.
The OPEC and allies will not want to risk triggering an economic downturn because of rapidly rising oil prices and continuing to lose market share by keeping supplies restricted.
The OPEC+ has been steadily raising its output as the global economy recovers from the Covid-19 pandemic. The group is still withholding more than 5 million barrels a day of production from the market.
At Thursday’s meeting, oil ministers will discuss production quotas for August, and possibly beyond. But with no Iran nuclear deal as yet there will likely be no changes to the previously agreed plan. If no changes are made, this should keep oil prices supported. However, if the OPEC+ opts to restore production more aggressively throughout the rest of the year, then that could see prices tumble.
FTSE testing support
With the European stock markets falling slightly today, it is worth keeping a close eye on the FTSE as it tests support around 7095, a level which was previously a key resistance in terms of the daily closing basis:
Source: ThinkMarkets and TradingView.com
But after Thursday’s closing break above 7095, today’s re-test of this level may lead to a bounce later on.
Resistance comes in around 7150 to 7170 area (shaded in gey on the chart). If we break through this area this week then I think a new high for the year will be on the cards next.
Here's what is on tap for the rest of the week
The last week of the month and quarter has started on a quiet note for data as there’s nothing significant scheduled for Monday. But from Tuesday onwards things will start to pick up. The week features a handful of potentially market-moving events, with US non-farm jobs report being the pick of the lot. We will also have the OPEC decision to look forward to as well as CPI estimates from Germany and the Eurozone.
Tuesday