Stock markets making modest gains once more on Friday, in what is likely to be rather uneventful trade as we make our way into the weekend.
This has been a common feature of the markets recently, small and steady gains that have seen European stocks push into record territory. They’ve been quietly putting together a great run over the last few weeks which has seen them not only deliver strong gains, but hit new records on a daily basis.
Good earnings and a strong vaccine program that has enabled looser restrictions, while reducing the threat of them being strictly reimposed later in the year are driving the gains. The outlook is very encouraging for Europe and we’re seeing that reflected in the indices. Of course, after such a strong run and going into a quieter period, there is the possibility that we could see some profit taking in the coming weeks.
The two weeks before Jackson Hole are looking a little uneventful with just the odd sprinkling of something to satisfy our appetite for more. The Fed minutes next week, for example, will naturally provide plenty of interest. Although we’ve heard so much from policy makers since the meeting, are we really going to learn that much?
The next couple of weeks could be all about delta and how well China, in particular, and others deal with the spread. China has shown its zero Covid approach has worked before and is not changing course, despite other countries taking a more relaxed approach thanks to the vaccines.
In closing the Meishan terminal at the Ningbo-Zhoushan port – one of the busiest in the world – as a result of one positive case, China has made it perfectly clear that it will take all measures – no matter how seemingly extreme – to contain any breakouts. What that means for the rest of the world is more supply disruptions in the months ahead, which could means more bottlenecks and higher costs.
But as central banks have shown, these are short-term problems with short-term price implications and while they may exacerbate headline inflation data further, they are willing to look beyond them. Although I’m sure from a markets perspective, it will add another layer of uncertainty and unease.
Oil reverses course on port closures
News of the port closure has been a drag on oil prices, with crude turning south yesterday just as it was heading for a third day of gains. WTI and Brent had rebounded off their lows around $65 and $67, respectively earlier this week and appeared to have established firm support in the area.
But the prospect of further strict shutdowns in China at the slightest hint of a breakout will have implications for growth in the worlds second largest economy and largest importer in the near-term. The outbreak in China, irrespective of how small the numbers currently appear, is a key catalyst behind crude prices tumbling from their highs again.
Should we see more evidence of these kinds of strict measures being imposed, we could see that support come under significant pressure. We’ve already seen the IEA revise down its expectations for the remaining months of the year as a result of delta. Further downward revisions will follow if it doesn’t come under control.
Can gold see temporary support?
Gold moved back into the $1,740-1,760 range early on in the US session on Thursday and it has traded here since. This falls around that previous barrier of support, the break of which triggered the flash crash at the start of the week. If it can break above here, it would be quite the turnaround but I’m not convinced it would be sustainable.
We have seen the dollar pull back slightly since the US inflation data release earlier this week and US yields have steadied, but this is more a reflection of some profit taking than anything else. The Fed is likely to make a tapering announcement in September and the Jackson Hole event in a couple of weeks could be the platform to lay the groundwork.
Perhaps we could see some profit taking ahead of the event, especially given the relative light news flow that’s expected. US data will provide points of interest, as will Fed commentary, but some profit taking could benefit gold in the short term. But I’d be surprised to see any significant gains ahead of the event.
Bitcoin correction short-lived but momentum already waning
Bitcoin is having another run at $47,000 at the end of the week. The pullback was quite shallow and short-lived in the end although it could still face resistance at the previous peak, where we’re already seeing momentum slip a little.
A failure to break $47,000 wouldn’t be any concern at this stage and could just be indicative of the correction having not run its course. The rally is looking perfectly healthy regardless of whether we see a breakout or a pullback.
Even a move below yesterday’s lows could just signal a bigger correction back to the $41,000 region, based on the double top that would have formed, which would see it run into prior resistance and the 61.8 fib of the August lows to highs.
