Tue, Jun 22, 2021 @ 08:52 GMT
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European Stocks Join the Rout; RBA Policy Decision Next

Here are the latest developments in global markets:

FOREX: The dollar index was little changed on Monday, last trading near the 89.10 level. Sterling/dollar was down more than 0.2%, pressured by the softer-than-anticipated UK services PMI for January. Dollar/yen fell nearly 0.3%, as the broader risk-off sentiment in equity markets strengthened the yen, which is typically regarded as a safe haven. Elsewhere, the aussie was 0.2% higher against the greenback ahead of the RBA’s policy decision, due at 0330 GMT on Tuesday.

STOCKS: European markets were a sea of red on Monday. The blue-chip Euro STOXX 50 was down by 0.9%, while the pan-European STOXX 600 fell 1.1%. In Germany, the DAX was 0.8% lower, while in France, the losses of the CAC 40 exceeded 1.0%. In the UK, the FTSE 100 edged lower by 1.2%. The rout in stocks appears to be in full swing at the moment, as the acceleration in US wages has spooked markets that higher inflation is on the way, causing US bond yields to surge. As yields move higher, bonds finally produce adequate returns to keep investors interested, potentially leading them to reduce their exposure to equities.

COMMODITIES: WTI crude oil traded 0.4% lower in the day, last seen near $65.00 per barrel after previously touching $64.62. Brent was down 0.9%, trading around $68 per barrel, with its intraday low being $67.69. In precious metals, gold advanced more than 0.3%, currently hovering near $1337 per ounce, perhaps buoyed by the risk-aversion prevailing in equity markets.

Day ahead: US data and Draghi’s speech in focus ahead of RBA decision

In terms of economic data, the only major release left on the agenda is the US ISM non-manufacturing PMI, which is due at 1500 GMT. Expectations are for the print to reach 56.5 in January, from 56.0 previously. Coming on top of recent encouraging US data, an increase in the non-manufacturing index would be one more factor supporting the case for the Fed to deliver three (or more) rates hikes this year, and could thereby help the dollar to recover somewhat further.

As for public appearances, Jerome Powell is due to be sworn in to the position of Fed chair at 1400 GMT, taking over from outgoing chair Janet Yellen. Even though Powell is widely perceived as someone who will continue the Fed’s current gradual approach to removing monetary accommodation, it is worth noting that markets have now started to contemplate the possibility of faster-than-signaled hikes in the future, amid signs that inflation might pick up soon.

At 1600 GMT, all eyes will turn to France, where ECB President Mario Draghi will address the European Parliament Plenary in Strasbourg. Several ECB officials have recently suggested that QE should begin to be unwound after September and it will be interesting to see whether Draghi echoes such remarks, especially after the Eurozone’s core CPI rate unexpectedly ticked up in January. The euro will also be sensitive to any remarks regarding the exchange rate.

As for central bank meetings, the Reserve Bank of Australia (RBA) will announce its rate decision during the Asian trading session Tuesday, at 0330 GMT. Policymakers are widely anticipated to keep interest rates unchanged and as such, attention will turn to the phrasing of the accompanying statement. The Bank is not expected to signal any major policy shift, especially following the disappointing CPI prints for the fourth quarter. Still, it could well toughen its language around the AUD, which has rallied notably in recent months, threatening to act as a drag on economic growth and inflation. Any hints that the RBA is becoming uncomfortable with the AUD’s strength are likely to act against the currency.

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