Português
Español
Français
русский
European and US financial markets are seeing a subdued start to the week, as expected given the absence of US market participants on account of the long Independence Day weekend. Without US participants in their usual driving seat, markets may struggle to trade off of/find a fresh narrative and liquidity conditions are likely to remain thin across asset classes. Risk appetite thus seems likely to remain supported today, in wake of the boost that global equities (led by US bourses) got from last Friday’s official jobs report. As a recap, 850K jobs were added to the US economy in the month of June, more than the 700K expected. Analysts have been framing the report as “goldilocks” (i.e. not so strong it results in a more hawkish Fed but strong enough to maintain confidence in the US recovery); while the headline jobs number was strong and saw gains spread evenly across the economy, the unemployment rate unexpectedly rose. At present, E-mini S&P 500 futures are trading just under the 4350 marks, only a few points below the record levels set by last Friday. US equity markets will reopen on Tuesday. Meanwhile, European bourses are a tad more mixed with the Stoxx 600 flat, with analysts citing concerns about the spread of the Delta Covid-19 variant on the continent as a reason for caution. Chinese stocks, meanwhile, struggled overnight, amid the weakest Chinese Caixin Services and Composite PMI reading since April 2020 and amid news of a crackdown by Chinese authorities on tech company Didi. Regional themes thus might play a slightly more important role than usual in terms of influencing the price action, but the consensus amongst analysts that in wake of Friday’s US jobs report, global equities should remain broadly supported ahead of the return of US players on Tuesday.
US bond markets are closed until Tuesday. Longer-term yields remaining subdued and close to/at recent lows last Friday, with 10-year yields continuing to steadily drop back towards the 1.40% mark and 10-year TIPS yields (the real, or inflation expectation adjusted, 10-year yield) falling properly under -0.90% for the first time since the first half of June. This week’s FOMC minutes will be more closely watched than usual given the Fed’s hawkish pivot at the last meeting with markets looking for further insight as to the landscape of opinion on the FOMC. Given the reaction of bond markets to recent strong data and the hawkish FOMC last month, it seems upside risks to yields this week are limited. With long-term yields at current levels (i.e. not super far above the historic lows set in wake of the onset of the pandemic), it seems as though markets continue to buy into the narrative that deflation rather than inflation is set to be the dominant force of the coming economic cycle, meaning that the Fed policy is likely to remain highly accommodative by historical standards, even when the Fed has completed its coming hiking cycle in a few years’ time. This is likely to keep the equity supportive theme of TINA (there is no alternative… to stocks) alive for the foreseeable future.
Turning now to commodities; crude oil traders are watching the ongoing impasse between OPEC+ member, or more specifically, the UAE and the rest of the cartel. The long and short of it is that all OPEC+ members agreed to the Saudi/Russian proposal to continue with production cuts until at least the end of the year, though to increase output gradually until then. The UAE wants a larger increase to production and also for a review of the baseline level from which production cuts are calculated from (which is currently based on output in September 2018). Talks begin again 1400BST and crude markets could be choppy. Most analysts expect some sort of compromise to be found, but if that involves higher crude production levels in the near-term, this could dampen crude oil appetite. Meanwhile, there is a tail risk of OPEC+ cooperation collapse and the return of the kind of price war seen back in April 2020, which could devastate crude prices. At present, WTI trades broadly flat just above $75.00 and Brent is just under $76.50, with both in wait and see mode and subdued amid the lack of US market participants. Turning to precious metals, gold continues to gradually rise amid the subdued US bond yield environment and loss of upside momentum in the US dollar and looks set for a fourth consecutive day of gains that has seen it recover from lows around $1750 last week to current levels around $1790. $1800 remains the key resistance, a level it has struggled to test after slipping below it after the recent hawkish FOMC meeting. US data and the FOMC minutes will be the main drivers of gold this week.
Elsewhere in FX markets, the US dollar continues to trade with a modestly bearish bias in wake of last week’s US jobs data. The DXY, which went as high as the 92.70s prior to the NFP release, has fallen back to the 92.10s and seems to have fallen back into its recent consolidation pattern around the 92.00 psychological level. US money markets seemed to modestly reduce their bets on early Fed tightening, which seems be weighing on the dollar. As with other US asset classes, things will likely pick up later in the week upon the return of US market participants on Tuesday as well as key US data releases. Meanwhile, G10 FX markets are narrowly mixed, with some outperformance being seen in NOK, GBP and JPY, each up about 0.2-0.3% versus USD on the day; sterling is perhaps being boosted by more economically constructive rhetoric from the government since the start of the weekend on the need to remove Covid-19 restrictions and “learn to live” with the virus. GBPUSD is back above 1.3850 from last week’s sub-1.3750 lows and USDJPY has slipped back under 111.00 from last week’s near-111.50 highs. CAD is the G10 underperformer despite resilient crude prices, with Loonie traders cautious ahead of the release of the BoC Business Outlook Survey later today and the all-important Canadian jobs report on Friday. USDCAD is currently consolidating close to 1.2350. The rest of the major G10 currencies, EUR, AUD, NZD and CHF are all pretty much flat on the session versus the US dollar, with euro traders awaiting July ZEW sentiment and Industrial Production data as well as a smattering of ECB speakers and the release of EU economic forecasts later in the week, while Aussie traders are cautious ahead of tonight’s RBA rate decision. EURUSD is subdued in the upper 1.1800s, AUDUSD is rangebound just under 0.7350 and NZDUSD remain decently supported just above 0.7000.
The Day Ahead
Today’s OPEC+ meeting is the most important event to keep note of today, as crude oil traders await to see if the impasse with the UAE can be breached. ECB President Lagarde is on the wires from 1230BST and is followed by fellow Governing Council members Enria and de Guindos who speak at 1700BST and 1800BST. Loonie traders should watch out for the BoC Business Outlook Survey at 1430BST. Otherwise, expect market conditions to be pretty dead amid the absence of the US.
