Sun, Aug 01, 2021 @ 10:26 GMT
HomeContributorsFundamental AnalysisNo Inflation, No Bubble, No Trouble

No Inflation, No Bubble, No Trouble

Monday moodiness didn’t last long in equities. The bulls returned and reflation was on the menu for most traders. European stocks advanced; the Dow Jones rallied 1.76% while Nasdaq added some 0.80%.

Activity in European futures point at a positive open on Tuesday. Firm oil and softer pound will likely keep the FTSE bulls on track for more gains today.

US crude extended gains on news that Raisi’s election in Iran raises difficulties for the nuclear talks and decreases the probability of seeing sanctions lifted for Iranian oil exports. In numbers, that means some 4-to-6 million barrels that won’t be added to the global supply per day. In sentiment, it means a positive push for oil prices. Still, the topside should remain capped near $75/78 per barrel, as rising oil prices would also fuel inflation expectations, revive the Fed hawks, and the prospects of a slower global recovery and a slower global demand in case of an untimely monetary tightening.

Former US treasury secretary Summers and Ray Dalio warned that we may be building a bubble. But as long as the bubble grows, there is no problem. The latter explains why the market doesn’t find time to look into the bubble warnings. The rebounds happen so fast that turning flat or turning to less risky assets haven’t been a good idea since a while, and it may not be for some more time. In the aftermath of events, ignoring the bubble warnings has proved profitable.

And who will be pumping in more air today?

The Fed Chair Jerome Powell will repeat that inflation is transitory and will drop back ‘as these transitory supply effects abate’. How much time do we have before the supply effects abate is a big question. Regardless, the risks are tilted to the upside for risk investors at Powell’s congressional testimony today. Powell’s got the markets back and he won’t let go.

On the yields front, the volatility hints at confusion and unanswered questions among investors, but the levels remain comfortably low to initiate any type of migration toward less risky assets. If any, the only migration we shall see is reflation, a move from growth to value.

In the FX, the greenback reversed a part of its recent gains versus its major G10 counterparts. Jay Powell’s speech will likely give a stronger case for a softer US dollar today.

Gold, on the other hand, is certainly not a buy right now. The positive correction will likely lack power to pull out the 100-day moving average resistance, at $1795 per oz, in an environment of indestructible risk appetite.

Overall, the market mood will likely remain positive in risk assets, and even in Bitcoin which came close to the $30K mark on news of another Chinese crackdown on miners. But the $30K support is very solid and seems to be holding right now. Technically, there are two make-or-break levels on the Bitcoin chart: the $30K support on the downside and the $43K resistance on the upside, which is the 200-day moving average. Which will break first is hard to tell, but the state of technical indicators hints that the $30K support could fall first. In fact, there is a death cross formation on the daily chart, warning that the technicals are in favour of a further Bitcoin selloff. However, I also read that the fact that the 200-day moving average is still on a rising path could prevent Bitcoin from a bloodbath in the short run, and that things would get more serious once the 200-day moving average turns its nose to the downside. In conclusion, the 43$K resistance should be won over quickly to avoid that from happening and if the bulls can’t make it above the 200-day moving average in the next couple of sessions, then the bears would come seriously in charge. And one last thing. Given the strength of the 30K support, we shall see a steep selloff if the support is broken. And the next stop below $30K is at $20K.

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