- Stocks and copper higher, dollar down
- Cryptos attempt recovery after weekend plunge
- Euro climbs to $1.20 ahead of ECB
- Lots of company earnings
Sentiment at the start of this week remained positive for most risk-sensitive assets. European stocks followed Asian markets and US equities higher. Copper prices rallied while crude oil held steady after a big upsurge last week. In FX, the dollar retreated, extending its losses from the previous week. The EUR/USD climbed above $1.20 while the pound extended its sharp rally from Friday. US bond yields dipped further, keeping gold supported.
Earnings season is heating up
The big banks posted positive results last week and more than 200 companies are expected to report this week, including 70+ S&P 500 companies. Blue-chips reporting today include Coca-Cola, IBM and United Airlines. Thanks in part to positive bank earnings last week, all major US indices closed higher last week, as the S&P 500 and Dow Jones Industrial Average rallied to new all-time highs. Will the Russell 2000 and Nasdaq Composite join them this week?
EUR/USD breaks 1.20 barrier
Last week also saw US bond yields drop somewhat surprisingly despite some more bumper economic data and bank earnings from the world’s largest economy. The dollar slipped, allowing other major as well as emerging currencies to rip, while gold also found some buyers. That trend has remained in place at the start of this week. The EUR/USD is catching some attention as it ripped higher this morning, breaking the $1.20 barrier. The single currency has found renewed support recently as it gets a boost from expectations that growth will accelerate in the coming months on the back of faster vaccinations. Will we see some evidence of that already in PMI data, on Friday? The ECB is likely to remain cautious and re-iterate the need to keep QE taps wide open on Thursday, which should keep the potential gains in check.
What’s causing this big risk rally?
So, as we start a new week, sentiment remains towards most risk assets. But what exactly is causing this, and can the optimism continue?
- Growing signs of economic recovery: In the US we have had lots of good data in the last couple of weeks, including a solid non-farm payrolls report, stronger CPI data and blowout retail sales figure. Still, bond yields failed to respond in the way you would expect and instead they have fallen, pushing the dollar down and gold up. Meanwhile, the pace of vaccinations has finally picked up in the Eurozone, which should hopefully push down the infection rates there and lead to easing of lockdowns. Growth at the world’s second largest economy accelerated as China recorded 18.3% q/y jump in GDP and 32.4% y/y rise in retail sales.
- Positive earnings expectations: Morgan Stanley was the last of the major lenders to report its numbers on Friday and like other banks it beat expectations. If bank earnings are anything to go by, then this reporting season could be a big one for other sectors too. We have plenty of more earnings coming up in the week ahead – see the economic and earnings calendar highlights section, below.
- Inflation not a concern: The market’s recent reaction implies investors are not very concerned about short-term strength in US data or inflation, after all. Most investors seem happy that the world’s largest economies are rebounding nicely, and central banks are maintaining their QE purchases programmes, fuelling the reflation trade. We are witnessing similar price action to when everything bottomed out in March 2020, as stocks, cryptos, gold, silver, copper and foreign currencies all surged higher.
- Virus surge ignored: As mentioned, sentiment remains upbeat because of growing optimism about a sharp economic recovery, even if there are no signs that the pandemic will be declared over any time soon. Coronavirus infections soared to a record high globally during the past seven days, topping 5.2 million globally, according to data from Johns Hopkins University. Investors are hopeful that the ongoing rollout of vaccines will bring infections down and allow travel and tourism to re-start in the coming months.
In the weeks ahead, the theme is likely to be a repeat of this week: long everything versus the dollar and buy the dips in the stock markets. This trend will only change when investors no longer think that the rise in inflation is going to be transitory or we see central bank heads change their tones noticeably about their respective monetary policy stances. For this to happen we need to see evidence of inflation rising more profoundly, which could encourage investors to start betting about a quicker tightening of monetary policy than expected, like we have seen in the Chinese markets where equities have struggled noticeably of late.
For now, the Federal Reserve Chairman Jerome Powell like other major central bank chiefs have made it clear that even though he’s optimistic on the economy, the rise in inflation is likely to be transitory. This message is likely to be echoed by Christine Lagarde at the ECB’s press conference on Thursday.
Therefore, any short-term dips we may see for risk assets in the coming weeks should be treated as retracements than a complete trend reversal, until such a time the markets create distinct reversal patterns like major lower lows etc.
Economic and earnings highlights
The economic calendar for the week ahead is a busy one with lots of macro data and a couple of central bank meetings to look forward to. The earnings calendar is jam packed. Here are the highlights:
- No major data
- Earnings: IBM, Coca-Cola, United Airlines and Petrofac
- Data: U.K. Average Earnings Index and Jobless Claims
- Earnings: Netflix, Johnson & Johnson, PG, Danone and Associated British Foods
- Data: CPI estimates from NZ, UK and Canada; Aussie retail sales and US crude oil inventories
- Bank of Canada policy decision and speech by BoE Governor Bailey
- Earnings: Verizon Communications and Carrefour
- Data: US jobless claims
- European Central Bank meeting and press conference
- Earnings: Intel, AT&T, Snap, American Airlines, Renault and Taylor Wimpy
- Data: Flash manufacturing and services PMIs from Eurozone, UK and US; U.K. retail sales
- Earnings: Royal Caribbean Cruises, Honeywell International
- Chart of the day: Bitcoin
- Keep an eye on Bitcoin as cryptos attempt recovery after plunge.
Apart from news of the breakaway super league involving 12 major European football teams, Cryptos also made the news over the weekend as prices collapsed.Bitcoin sank from above $60K to below $52K for the first time since March 26 on Sunday, before bouncing back to trim its losses sharply.
At around $57K on Monday morning, Bitcoin remained nearly $8K or ~12% below its record high of just under $64900.
But every single dip has been bought and this may turn out to be another such occasions. The technical bias would only turn decisively bearish when prices create a major lower low. The last low comes in at around $50300, where we also have a bullish trend line converging. So, a potential move below that level would be deemed a bearish technical breakthrough.
At current prices, the crypto remains in no man’s land. The key level of resistance is now at around $60K, previously resistance and support. Given Bitcoin’s inability to hold above this level, we may see further profit-taking from the longs if the digital currency gets around that level again.