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STOCKS

Dow has come-off after testing 35000 and needs to sustain above 34500 to keep the chances alive of breaking above 35100 from here. DAX hovers at the upper end of its 15400-15800 range and needs to see if it is breaking above 15800 or will retain the sideways range. Nikkei sustains above 28500 and has room to move up in the near-term. Shanghai can remain within its 3500-3625 range for some more time. Sensex and Nifty can also continue to oscillate within their 52000-53000 and 15600-15900 range respectively.

Dow (34888.79, −107.39, -0.31%) failed to sustain the break above 35000 yesterday and has closed lower. We reiterate that a strong rise past 35100 is needed to strengthen the bullish case for a rise to 36000. For this the Dow has to sustain above 34500 in the coming days. A break below 34500 will increase the chances of revisiting 33500 levels on the downside.

DAX (15789.64, −0.87, -0.01%) hovers at the key resistance level of 15800. A strong break above 15800 is needed for the DAX to move further up towards 16000 and 16200. Else the 15400-15800 range can continue to remain intact for some more time. Also as mentioned yesterday, DAX will have to rise past 16200 to become extremely bullish.

Nikkei (28652.19, −66.05, -0.23%) sustains above 28500 and keeps intact our view of seeing a rise to 29000-29500 in the coming days. Inability break 29500 from here can keep the index in the range of 27500-29500 for some time. However, the bias is positive to see a strong break above 29500 and a subsequent rise past 30000 to target 31000-32000 if not immediately but eventually over the medium-term.

Shanghai (3529.64, −36.88, -1.03%) oscillates near the middle of its 3500-3625 range. We expect it to retain this range for some more time before a break above 3625 and a rise to 3700-3800 is seen over the medium-term. In case if Shanghai breaks below 3500, an extended fall to 3450-3400 is possible before a fresh rise which in turn will delay the rally to 3700-3800 mentioned above.

As expected, the Sensex (52769.73, +397.04, +0.76%) and Nifty (15812.35, +119.75, +0.76%) moved up within their 52000-53000 and 15600-15900 range respectively yesterday. The indices can remain stuck inside this range for some more time before we get an eventual break on the upside and see a rise to 54000 (Sensex) and 16000-16200 (Nifty) going forward.

COMMODITIES

Commodities see a short pull back today but may soon recover to head back to higher levels. The International Energy Agency (IEA) in its monthly report released yesterday mentioned a possibility of depending oil supply deficit if OPEC+ is unable to reach on a deal. The agency expects crude price to remain volatile until the OPEC+ gives further clarity on its production policy. Crude prices have dipped a bit but can rally towards $78-80 soon before a decline is seen in the medium term. Gold, Silver and Copper have dipped too and could rise back soon in the coming sessions. A range of 1770-1820/40, 25.80-26.50 and 4.15-4.40 may hold respectively on Gold, Silver and Copper.

Brent (76.31) and WTI (75.02) have dipped slightly from $76.48 and $75.22 respectively. A short pull back is possible while below $77/78 levels before attempting to move higher and test resistance zone of $78-80 on the upside. The current dip is short lived and we may expect a rise in the prices soon towards crucial resistance levels.

Gold (1810.40) rose to test 1813 yesterday but has not been able to rise further to test 1820. While below 1820, we may expect a ranged movement between 1820-1790 region before the price attempts to rise towards 1840 or higher in the longer run. Trend support is seen near 1780/70.

Silver (26.07) has dipped instead of moving higher to test 26.50-27. The price can test 26.0-25.80 before again bouncing back to higher levels. A range of 25.80-26.50 may hold well for the near term.

Copper (4.2720) has dipped after a short rise seen yesterday. Overall range of 4.15-4.40 may hold for another week or so before a break on either side is seen.

FOREX

Dollar Index moved up sharply to test 92.80 after a higher than expected US CPI data release yesterday, dragging down Euro to levels below 1.18 and pulling down other currencies globally. Aussie and Pound have fallen sharply too but could soon bounce back from current levels. EURJPY has fallen sharply and could head towards 129.50 while below immediate resistance at 131. Dollar Yen rose to test 110.80 as expected and could now see a corrective dip towards 110.50/30 before again attempting to rise further. USDINR may rise to test 74.60 and any break on the upside can open up chances of a rise to 74.80 or even 75. Weak Chinese Yuan and weak Euro may support weak Rupee today.

Dollar Index (92.7250) is holding below 92.80 just now. The index saw a sharp rise to 92.80 yesterday after the US CPI data release that came out higher than expected. We need to see if the rise sustains or the index falls back towards 92 in the coming sessions.

Euro (1.1783) fell sharply below 1.18 and is yet to see any corrective rise from there. Any fall below current levels would make Euro vulnerable to test 1.1750 on the downside before a bounce is seen. Watch price action near current levels.

EURJPY (130.21) fell sharply and could not sustain a rise above 131. We may expect a fall in the cross towards 129.50-129.00 in the near to medium term.

Dollar-Yen (110.49) has dipped from 110.70 as expected yesterday. We may now see the corrective dip to extend towards 110.50/110.30 before a rise back to higher levels is seen. Immediate support is seen at 110 and while that holds, overall view is bullish to test 111 or higher.

Aussie (0.7463) has bounced well and can rise towards 0.75 in the near term. View is bullish for the very near term.

Pound (1.3820) has bounced a bit after facing a sharp fall yesterday. A rise back towards 1.3850-1.3900 can be possible soon.

USDCNY (6.4748) has bounced well as expected and can be headed towards 6.48/50 in the near term. View is bullish while above 6.46.

USDINR (74.5750) could possibly attempt to rise within the 74.40-74.60 range as Euro has weakened a bit along with some weakness in the Chinese Yuan. Any break above 74.60 would again open up chances of a rise to 74.75/80 on the upside, delaying immediate chances if falling towards 74.20/74.00. Watch for a possible rise today and price action near 74.60.

INTEREST RATES

The US Treasury yields had risen yesterday following the inflation data release. The US Headline CPI rose 5.3% (YoY) and the Core CPI surged 4.45% (YoY) in June. The expected corrective rise in the Treasury yields is happening now and there is room to move up further from here. The German yields remain lower and stable. The view is bearish to see further fall from here. The 10Yr GoI fell yesterday but is holding well above its support at 6.18%. While above this support the near-term outlook is bullish.

The US 2Yr (0.25%), 5Yr (0.83%), 10Yr (1.40%) and 30Yr (2.03%) Treasury yields have moved up across tenors. The corrective rise to 1.45%-1.5% on the 10Yr and 2.1%-2.2% 30Yr is happening in line with our expectation. Thereafter a fresh fall is possible. We will have to wait and watch. Supports are at 1.25%-1.2% (10Yr) and 1.9% (30Yr).

The German 2Yr (-0.68%), 5Yr (-0.60%), 10Yr (-0.30%), 30Yr (0.20%) continues to trade stable. We retain our bearish view of seeing a fall to 0.10%-0.8% (30Yr) and -0.45% / -0.50% (10Yr) in the coming weeks.

The 10Yr GoI (6.2044%)has risen back sharply from the low of 6.1885% yesterday. 6.19%-6.18% is a good support zone while above which the outlook is bullish to see a test of 6.3%-6.32% on the upside. Thereafter a fresh fall is possible.

Key Highlights

• Gold price started an upside correction from the $1,750 support.
• It is facing resistance near $1,820 and $1,835 on the 4-hours chart.
• EUR/USD could extend losses below 1.1750, GBP/USD failed to surpass 1.3900 and declined.
• The US CPI increased 5.4% in June 2021 (YoY), up from the last 5%.

Gold Price Technical Analysis

This past month, gold price saw a steady decline below $1,850 against the US Dollar. The price even traded below the $1,800 level before the bulls appeared near the $1,750 level.

The 4-hours chart of XAU/USD indicates that the price started a decent recovery wave from the $1,750 swing low. The price climbed above the $1,780 and $1,800 resistance levels.

There was also a close above $1,800 and the 100 simple moving average (red, 4-hours). However, the price is struggling to gain pace above $1,815 and $1,820. The next key resistance is near $1,835 and the 200 simple moving average (green, 4-hours).

The 50% Fib retracement level of the main decline from the $1,916 swing high to $1,750 low is also near the $1,833 level. A close above the $1,835 and $1,840 levels could start a steady increase towards the $1,900 level.

If not, the price could start a fresh decline below the $1,790 support level and the 100 SMA. The next major support is near the $1,750 level.

Fundamentally, the US CPI report for June 2021 was released yesterday by the US Bureau of Labor Statistics. The market was looking for an increase of 4.9% in the CPI compared with the same month a year ago.

The actual result was above the market forecast, as the US CPI increased 5.4% (YoY). Looking at the monthly change, there was an increase of 0.9%, up from the last 0.6%.

Overall, the US Dollar saw bullish moves after the release. It impacted both EUR/USD and GBP/USD, with bearish moves below 1.1850 and 1.3850.

Economic Releases to Watch Today

• UK Consumer Price Index for June 2021 (YoY) – Forecast +2.2%, versus +2.1% previous.
• UK Core Consumer Price Index for June 2021 (YoY) – Forecast +2.0%, versus +2.0% previous.
• US Producer Price Index for June 2021 (MoM) – Forecast +0.6%, versus +0.8% previous.
• US Producer Price Index for June 2021 (YoY) – Forecast +6.8%, versus +6.6% previous.
• BoC Interest Rate Decision – Forecast 0.25%, versus 0.25% previous.

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US stocks initially shrugged off a strong start to earnings seasons and traded lower after a hot inflation report unnerved some investors as expectations grow that the Fed will have to acknowledge that higher inflation will stick around. Today’s earnings season kick-off saw spectacular results from Pepsico, solid numbers from Goldman Sachs and mixed earnings from JPMorgan. The bar is set very high for this earnings season and given the valuation peaks with tech stocks, it will take several upside surprises to keep the major indexes making fresh record highs.

After Wall Street had some time to digest the hot CPI report, the transitory argument still holds water and stocks quickly pared those losses. Boeing’s news that they have a new issue and will cut 787 Dreamliner production was very disappointing and is weighing heavily on the Dow Jones Industrial Average.

JPMorgan

JPMorgan shares traded lower after a busy earnings report showed many strong beats that could not beat all the high expectations. A slight miss in both managed Net Interest Income and fixed income sales & trading miss disappointed many as that is actually their bread and butter. Second quarter Managed NII fell 9% from a year ago to USD 12.9 billion, also a miss of the $13.1 billion analysts’ forecast, while FICC sales and trading came in at USD 4.10 billion, a miss of the USD 4.12 billion.

JPMorgan’s cash situation improved after a USD 3 billion credit reserve release.

The bar was set too high for JPMorgan and today’s results don’t paint a good picture for the rest of the banks. Loan growth might not really improve until next year and that might be a drag for financials in the short-term.

Goldman

Goldman Sachs shares initially surged after a robust earnings beat, EPS of USD 15.02, much higher than the USD 9.57 estimate and revenue of USD 15.4 billion which easily beat the USD 11.5 billion estimate. Goldman had lighter FICC sales and trading revenue, but lower expenses which highlight an efficiency advantage over JPMorgan.

Goldman Sachs noted that inflation is likely to be transitory, but also emphasized concern about the prospect of a pandemic resurgence.

Pepsi

PepsiCo had a textbook solid earnings report, strong organic revenue growth and raised forecasts sent shares higher. The return of restaurants is driving Pepsico’s success and that allowed them to raise their full-year earning growth target.

US CPI surges in June

The June CPI report showed that everything is getting more expensive for the US consumer. Wall Street reacted strongly to a hotter than expected CPI data that sent short-end Treasury yields higher. Pricing pressures were most notable with used auto prices, hotel room rates, airline fares, clothing and food and lodging away from home. A lot of this still looks transitory, but if prices continue to stay elevated, the Fed will have to concede that parts of the surge prices will be transitory.

Today’s CPI data continues to support the idea of a taper announcement at the Jackson Hole Symposium.

Oil steadies, gold whips around

Crude prices are all over the place as energy traders try to price in a tighter market thanks to OPEC+ while a hot inflation report sent the dollar higher. Many traders are looking ahead to the US crude oil inventory data which could show yet another significant drop in stockpiles. The supply deficit story along with still improving demand in Q3 suggests whatever oil weakness is happening could be short-lived. The oil market could get a lot tighter very quickly and that could mean the recent pullback might have run its course.

Gold retreats after US CPI jumps

Gold gave up earlier gains after hot inflation data sent the dollar higher as investors scrambled to sell Treasuries. Expectations were for inflation to remain tame or slightly ease and that did not happen today. Despite a little inflation shock, after traders processed the report, the argument can still be made that most of this will be transitory. Used cars and trucks were responsible for one-third of the seasonally adjusted increase. The playbook for the Fed still looks like a taper announcement to be made at Jackson Hole, or at the September policy meeting at the latest. Policy normalization expectations may move forward following today’s data, but the bull case still remains in place for gold.

After the dust settled from the hotter-than-expected CPI report, gold prices edged higher as this still probably won’t move the needle for the Fed.

The Canadian dollar is in negative territory on Tuesday. Currently, USD/CAD is trading at 1.2524, up 0.57%.

US inflation lifts greenback

The Federal Reserve has long maintained that higher inflation levels are transitory, but this message is sure to ring somewhat hollow after inflation surged in June. Core CPI climbed 0.9% MoM, well above the estimate of 0.4% and ahead of the May read of 0.7%. On an annualized basis, Core CPI jumped 4.5%, above the consensus of 4.0% and up from the May reading of 3.8%. This marked the highest rate of core inflation since 1991.

The strong numbers have lifted the US dollar, as speculation grows that the Federal Reserve may be forced to tighten policy sooner and more aggressively than expected in order to curb inflation from getting out of control. US Treasury yields have been falling sharply, reflecting fears that the Fed might overshoot its inflation target of 2%.

The Bank of Canada holds its policy meeting on Wednesday (14:00 GMT). The BoC was the first major central bank to scale back bond purchases and is expected to taper for a third time on Wednesday, reducing weekly purchases from CAD 3 billion dollars to 2 billion dollars. Last week’s employment report which showed a gain of 230 thousand new jobs in June makes a taper even more likely.

What lies down the road for the BoC? An ING report said that it expects the central bank to shut down the QE program by the end of this year, with rate hikes to follow in the second half of 2022. The report added that inflation is higher than the BoC target and the economy is on an “encouraging growth path”.  The economy may be headed in the right direction, but a resurgence of Covid in Canada could be the spoke in the wheels of the BoC’s monetary exit strategy.

USD/CAD Technical

• USD/CAD faces resistance at 1.2594. Above, there is resistance at 1.2735
• On the downside, there is support at 1.2307. Below, there is support at 1.2161

Economic growth numbers out of China will hit the markets at 02:00 GMT Thursday. The world’s second-largest economy seems to be losing momentum and Chinese authorities have responded by adding more liquidity to the financial system, which is a risky move. Besides the yuan, the upcoming data could also impact stock markets and the Australian dollar. 

Gamble

The Chinese economy seems to be losing steam. Business surveys like the PMIs declined sharply in June, signalling a slowdown in growth as new coronavirus outbreaks forced manufacturing hubs in southern China to go back into lockdown and supply chain problems continued to rage.

Last week, the central bank stepped in to address this, cutting its reserve requirement ratio for commercial banks. The move was designed to free up capital that banks can then lend out to the real economy, ultimately boosting growth. But this is a risky tactic. 

China has a huge problem with private debt and enormous leverage in the banking sector, which regulators have tried to suppress for years. Indebted businesses and a massive banking system are a recipe for a financial crisis. When you cut reserve requirements, you incentivize even more lending, adding more fuel to this fire.

The fact that Chinese authorities were willing to take this gamble shows just how concerned they are about an economic slowdown, prioritizing that over financial stability.

Peak growth?

The upcoming dataset could confirm this narrative. GDP growth is expected to have slowed to 8.1% in the second quarter, from 18.3% previously in yearly terms. To be fair, much of this slowdown is mechanical - it comes down to base effects from last year’s slump fading out of the yearly calculation.

Still, it’s a bad look as it suggests that growth might have peaked already. Retail sales, industrial production, and fixed asset investment are all expected to have slowed in June as well.

Aussie in the spotlight

Turning to the market reaction, besides the Chinese yuan, this data will also impact the Australian dollar and global stock markets. China is Australia’s closest trading partner, so the trend in Chinese data is also crucial for Australian ones.

In fact, the aussie is often viewed as a liquid proxy for ‘China plays’. Speculators favor it over the yuan for betting on the Chinese economy, as shorting the yuan for example implies the added risk of being caught on the wrong side of FX intervention by the nation’s authorities.

If the recent cut in reserve ratios by the Chinese central bank really foreshadowed a disappointment in GDP growth this week, then the aussie could take another hit. Taking a technical look at aussie/dollar, initial support to any declines could come from the 0.7410 zone, a break of which would turn the focus towards 0.7340.

On the other hand, a positive surprise in GDP could see the pair push higher to challenge the 0.7530 region. If the bulls manage to pierce above it, their next target could be the 0.7600 handle.

All told, the latest moves by Chinese authorities are a negative signal about the economy’s fortunes and also amplify financial stability risks. A persistent slowdown in China could keep the aussie under pressure, especially considering that the Reserve Bank of Australia could be among the last central banks to raise rates this cycle.

The Bank of Canada will announce its latest monetary policy decision on Wednesday at 14:00 GMT, which will be followed by a press conference by Governor Tiff Macklem at 15:00 GMT. With Canada’s economic recovery from the pandemic ticking along nicely, the BoC looks set to further scale back its bond purchases. However, looking at the Canadian dollar’s recent performance, it’s hard to tell that the BoC is the first major central bank to begin the tapering process. As worries about the latest escalation in virus cases weigh on the markets, can the Delta variant derail the Bank’s exit strategy?

Further tapering certain after strong jobs gain

Market pundits were already predicting that the Bank of Canada was on course to reduce its weekly bond purchases at the July meeting and after last Friday’s robust jobs report, they are even more certain. The Canadian economy added an incredible 230.1k jobs in June, and although it was a natural rebound given two months of steep declines in employment, it does nevertheless seal the deal for further tapering as early as the next meeting on Wednesday.

Policymakers last adjusted the pace of QE in April, slowing the weekly purchases from C$4 billion to C$3 billion. They will likely cut the weekly target again by another C$1 billion to C$2 billion. The outlook for the Canadian economy has improved markedly in recent weeks as the combination of falling infection rates domestically and internationally and subsequent easing of virus restrictions have jumpstarted the recovery, which had stalled earlier this year due to the winter surge in Covid-19 cases.

Delta strain unlikely to scare BoC just yet

Whilst the virus threat is heightened again amid the new Delta variant, which is spreading extremely fast in many parts of the world, policymakers will probably point to the county’s impressive vaccine rollout as reason not to panic. After a sluggish start, Canada’s inoculation rate has now surpassed the United States’ and is only behind the UK among the big nations.

Moreover, the BoC’s own Business Outlook Survey published just a week ago painted a very bright picture regarding business sentiment and the broadening recovery. Hence, it’s difficult to see policymakers being too concerned about the possibility of the Delta variant wrecking all the optimism just yet.

Hawkish BoC little comfort to loonie

If the BoC goes ahead and tapers for a third time, the loonie could firm towards the C$1.23 per US dollar level. The currency has pulled back substantially after hitting a six-year high of C$1.2002 to the dollar on June 1. For the bulls to take charge again, the 50-day moving average, currently near C$1.2213, needs to be reclaimed.

But that might be difficult to achieve unless the Bank surprises markets with a much more hawkish stance than anticipated. In particular, if policymakers hint in their quarterly projections that rates could rise in the first half of 2022, which would be earlier than the last estimate of H2, the loonie could soar.

However, should risk sentiment remain dampened by fears that the Delta outbreak will take the steam out of the global rebound in economic growth and safe havens like the US dollar stay elevated, the loonie might struggle regardless of what the BoC says or does this week. If the loonie’s slide extends towards C$1.2631, which is where the 200-day moving average is converging with the 23.6% Fibonacci retracement of the March 2020-June 2021 move, the short-term downtrend might become a longer-term bearish shift.

SNB Chairman Thomas Jordan said that changing the inflation target "does not seem to be the right solution for Switzerland." He explained, "first, it is unclear to what extent inflation expectations would align easily with the new target, the benefits may be lower than expected".

"Unless the inflation target was increased by several percentage points, the policy space would be relatively small," he added. "Under these circumstances, unconventional policy measures would remain important."

He also reiterated, "in order to fulfill our mandate of price stability we will continue to use unconventional policy measures like negative interest rates and foreign exchange market interventions where necessary."

Markets

Today’s market headliner was US inflation. June headline CPI unexpectedly accelerated 0.9% m/m to surge to 5.4% y/y (4.9% consensus), up from an already elevated 5% in May. Inflation last seen this high was in July 2008, when it reached a peak before the Great Recession struck. Core inflation also soared with 0.9% m/m, bringing the yearly measure at 4.5%, way above the 4% expected. We need to go back three decades (!) to see similar levels. Food (0.8% m/m) and energy (1.5% m/m) supported the speedier price developments. Regarding the drivers of core inflation, we notice the continued extraordinary upward price pressures in used cars and trucks of a whopping monthly 10.5%. This alone accounted for one third of the CPI gain. Used cars are extremely popular to both companies and consumers since both decided to skip queues for new cars due to the global chip shortage. Travel and other categories related to the reopening of the economy also delivered their fair share to the June CPI figure. The monthly advances were even strong enough to compensate for the fading base effects that have benefited headline CPI up until May.

The US data, which also showed NFIB Small Business Optimism recover further from 99.6 to 102.5, reinforced the earlier dollar strengthening. EUR/USD opened around 1.186, gave up intermediate support at 1.1836 to trade at 1.182. The next reference lies at 1.178 before the March 2021 low of 1.1704 but looks safe for now. The trade-weighted DXY bounced off support from the lower bound of the upward trend channel (low 92.2 area) to change hands at 92.69. USD/JPY ekes out a third daily gain north of 110(.44). Fixed income is still digesting what this inflation means for Fed policy going forward. US yields at some point rose more than 3 bps across the curve but especially the long end is having second thoughts. The curve at the time of writing flattens once again with changes varying from +2.4 bps (2y) to -3.7 bps (30y). The US 10y real yield is even back at -1% for the first time since February. Yet, the Fed clearly indicated it would first taper bond buying before ever touching on policy rates when it starts normalizing policy, probably in coming months. Together with the already substantial outperformance of the long end these last few months, it makes current market moves all the more puzzling.

News Headlines

Inflation in the Czech Republic in June rose 0.5% M/M to be up 2.8% Y/Y. Yearly inflation in May touched a short-term peak of 2.9%. Still the June figure was higher than markets and the CNB expected. Core inflation was also higher than the CNB expected, driven by faster growth in prices of goods and services as was the rise in fuel prices. A surprising slowdown in food inflation, which remains volatile, had the opposite effect. The CNB expects core inflation to slow only gradually due to domestic demand pressures and brisk growth in industrial prices abroad. This inflation outlook was at the basis of the CNB starting a genuine rate cycle in June, with follow-up hikes expected later this year and next year. The krona gained modest further ground after the CPI data release. EUR/CZK trades near 25.64.

According to Bloomberg, Polish central bank member Grazyna Ancyparowicz in an interview said that, if it’s necessary to help the government, for example by buying bonds there is no limit for such purchases. The central bank sees the QE program as open ended in case the bank has to respond to another wave of corona lockdowns hampering the economy. Even as the MPC is divided on how the handle current rise in inflation, the zloty stays in the defensive as the majority of the MPC maintains a wait-and see approach. A stronger dollar and an indecisive risk sentiment are weighing on the Polish currency too. EUR/PLN is at risk of breaking beyond the 4.554 resistance.

ECB Governing Council member Mario Centeno said, "when we are reviewing the strategy, broadening the leeway of the allowable inflation trajectories, it is very important that the forward guidance is adapted to this new framework, otherwise it would lose credibility." But he emphasized that "there is no overshooting logic or average inflation rate" in the new strategy.

Centeno explained that the new 2% symmetric inflation target means "positive or negative deviations are equally undesirable". It gives "greater room for maneuver than before." "The strategy admits a temporary and moderate inflation values above 2% … We must be patient and tolerant with deviations that we would not tolerate previously," he said.

He also said the main cause of recent rise in inflation are "eminently temporary". And, "it is expected that these factors, which will temporarily raise inflation in 2021, will not last and so our forecast for 2023 is 1.4%, significantly below 2%."