Sentiment has soured at the start of the week, with Europe seeing its winning streak broken and the US continuing to add to Friday’s retracement.
Stock markets have been on a good run in recent weeks and the pullback on Monday probably has a lot to do with it. Yes, there’s been a few bad economic numbers, starting with the UoM consumer sentiment reading on Friday, when the corrective move started, but the market was primed for some profit taking anyway and investors are probably seizing the opportunitely.
The Chinese data overnight is going to feed into the near-term uncertainty in the country as it desperately tries to get its Covid outbreak under control early. Retail sales, industrial production and fixed asset investment all significantly missed while unemployment was a little higher at 5.1%.
While some of the miss was attributed to weather-related issues, the Covid outbreak and containment measures are going to take a toll as well, creating problems not just for China but trading partners as well. More supply issues and bottlenecks are likely if these measures don’t resolve the issue quickly.
Chinese growth has been a downside risk for the markets for weeks though and the data is just confirming what many suspected. The US survey is unwelcome but the other data we’ve seen from the country has been far better. And concerns about the outlook with delta cases surging around the world is perfectly understandable and not new, as we saw in the euro area ZEW data last week.
With so much seemingly riding on the Fed in the coming weeks, I wonder whether we may see some more caution now in the run up to next week’s Jackson Hole event, when Jerome Powell may lay the groundwork for a tapering announcement in September.
We also have Fed minutes this week – although they’re arguably very outdated at this point following a plethora of Fed speakers in recent weeks – and Chair Powell will speak at a Town Hall event tomorrow which will no doubt be followed closely. That aside, it isn’t the busiest of weeks for the markets.
Oil testing lows on China growth concerns
Oil prices are pulling back once more on Monday and once again taking a run at those lows we saw mid-July and last week. The sell-off has accelerated today but actually started last Thursday after WTI ran into a wall of resistance just shy of $70, which aside from being a psychological barrier is also a 50% retracement of the move from the late July highs to last week’s lows.
This doesn’t bode well for crude in the near-term, especially with risk appetite looking a little more negative at the start of the week and Chinese growth fears rising. A move below $65 would see attention shift back to $60, a surprisingly large correction overall when just over a month ago it was not far from $80. But the near-term trend is very much against it and the Chinese near-term outlook is weighing heavily.
Gold leaps higher but challenges remain above
Gold is surprisingly thriving a week after a small flash crash sent it tumbling back towards $1,680. Since then, the yellow metal has done well; a combination of an overexaggerated initial move being unwound and a softer dollar/lower yields giving it new life. The US consumer sentiment data on Friday was particularly good for gold as it sent US yields and the dollar sharply lower.
I think people had become overly bullish following a raft of good data and hawkish Fed commentary so when the profit taking came, it did so in aggressive fashion. Naturally, the worst sentiment reading in almost a decade turbo-charged the move, which is why gold exploded back above the $1,740-$1,760 resistance zone and now finds itself flirting with $1,800 once more.
Unfortunately for the yellow metal, unless this is the first in a series of shocking economic numbers for the US, I don’t think it’s fortunes have drastically improved. It will struggle to break $1,800 and the fact that it marks the 50% retracement of the early June highs to August lows won’t help matters.
Bitcoin breaks resistance but lacks momentum
Bitcoin finally broke $47,000 earlier today but once again it made new highs without the corresponding surge in momentum which isn’t ideal. While through the 50% retracement level, finally, after a week of running into significant resistance, this loss of momentum on route to $50,000 isn’t exactly filling me with confidence.
While the outlook continues to look bullish in the medium-term, a near-term correction may be on the cards. It’s rallied strongly over the last month but there’s no doubt it’s been running on fumes the last week. While $50,000 looks a big psychological barrier, $51,000 is the 61.8% retracement of the move from the all-time highs to the June lows, which could provide a significant wall of resistance.
