Stocks bounce back after taper tantrum sell-off last week

Is this a corrective oversold rebound, or something more significant?
 

After risk assets had sold off last week in what looked like a mini taper tantrum, sentiment improved after a bit of intervention from the Bank of Japan and 'bargain hunting’ as traders took advantage of oversold prices. European stocks and US futures managed to rebound sharply off their overnight lows by mid-morning London after futures had extended their losses along with Asian markets. The FTSE was boosted by supermarkets with shares of Morrisons rising 30% after it rejected a takeover bid from Clayton, Dubilier & Rice, a private equity giant in the US, with investors anticipating there might be an improved offer. The German DAX index was also up sharply,testing a key resistance area at the time of writing:

Source: ThinkMarkets and TradingView.com

In FX, the US dollar fell back as currencies which had sold off sharply last week finally managed to catch a bid. Gold was also up as the dollar sold off. But cryptos remained under pressure as concerns over China intensifying its crypto mining crackdown pushed the price of Bitcoin closer to $30K, with other cryptos also falling sharply on the session. With the lack of any significant positive news flow, crypto traders are happy to sit on the offers for now.
 
Overall, it is far too early to say whether this is the bottom or just a corrective, oversold, rebound for equities, and the top for the US dollar. What has certainly helped though is more central bank intervention. A bit of a sell-off triggered a response from the bank of Japan, who reportedly purchased 70.1 billion yen worth of stock ETFs today, the first purchase since 21 April.
 
However, it is concerns about central banks tightening their belts that is the main source worry for investors. On Friday, the stock market losses accelerated after the Fed's Bullard admitted that "it is natural we have tilted a little bit more hawkish." Investors fear that with inflation rising rapidly, QE might be tapered sooner than expected.  It will be the Bank of England’s turn on Thursday to provide its assessment of the economy and interest rates outlook. If the UK central bank turns out to be more hawkish than expected, this could trigger a fresh round of selloff for UK stocks.
 
In so far as today’s session is concerned and with the BoJ news aside, there is little in the way of fresh stimulus to encourage investors to add to their risk holdings. So, I wouldn’t be surprised if the markets dipped again after this rebound. A lot of technical damage has already been incurred after last week’s sell-off and many investors will be happy to use today’s rebound to get out of their positions, they accumulated during last week’s drop, at minimal cost or a small profit.
 
Meanwhile, the return to a more normal life and summer holidays in Europe might be at risk, providing additional risk for stocks in the tourism and hospitality sectors. The Delta coronavirus variant that has swept the UK has become dominant in Portugal and appeared in clusters across Germany, France and Spain.  European health officials have warned that further action might be needed to slow its spread.
 
Looking ahead
 
So far in the week, there was little further follow-through in terms of the post Fed-reaction. But it is possible we may see renewed weakness in the markets, especially for value stocks, later in the week.
 
It is worth keeping a close eye on commodities and other markets that have benefitted from the reopening, all seeing a pullback amid the rebounding US dollar and as supply bottlenecks ease. Copper had its worst week in 2021, while gold and silver were also some of the standout losers last week. Crude oil managed to hang nears its highs, but it will not be immune to a rebounding dollar and risk-off sentiment. If oil does turn lower, this could have ramifications elsewhere too. The S&P energy sector (XLE), which has been this year's best performer, fell sharply last week and we may see further weakness in early next week. As a result, it could weigh heavily on the benchmark S&P 500 index. The likes of the Canadian dollar and Norwegian Krone could also suffer, given their reliance on energy exports. It is not just the metals, but soft commodities have also fallen sharply, with some such as soybeans wiping out their entire 2021 gains. Corn and wheat have also fallen sharply, along with sugar and lumber prices. With the trend turning bearish, I wouldn’t be surprised to see at least some downside follow-through in the early parts of this week – and maybe longer. But the downside is likely to be limited because of expectations of stronger demand as global economies re-open.
 
Macroeconomic highlights
 
The week ahead features a handful of market moving events, which include the publication of global PMIs, the Bank of England’s policy announcement and the Fed’s preferred measure of inflation.
 
Monday
 

Tuesday
 

Wednesday
 

The Eurozone PMIs will be monitored closely as they will provide a good indication about the health of the consumer and the impact of the latest easing of lockdown measures.  Could the euro finally find its feet after dropping below $1.19 in response to a hawkish Fed? It will have a chance if the Eurozone data comes in much stronger.

Thursday
 

Fears that the Bank of England might also turn hawkish has weighed on the FTSE and supported some pound crosses, such as the GBP/NZD, although the GBP/USD has been undermined by the rallying dollar and GBP/JPY by the strength of safe haven Japanese yen. If the BoE signals tightening then expect the pound to gain further strength. However, if the UK central bank turns out to be more dovish than expected then, all else being equal, this should provide support to the FTSE.

Friday
 

 
On the last day of the week, we will have more inflation data to look forward to, including the Fed’s favourite: the core PCE price index. If this shows accelerating prices then this will only boost tapering speculation further, now that the Fed has started talking about, talking about tapering. If so, it could provide the dollar with renewed strength and may be bad news for stocks.