Risk appetite took a turn for the better at the end of last week despite an array of the usual suspect risk factors (accelerating Covid-19 cases, US-China tensions, rich valuations). This kept the US dollar under pressure given the inverse relationship between equities and the USD over recent weeks. Market positioning continues to show sentiment for the USD remaining negative (CFTC IMM data revealed that aggregate USD speculative positions have been net short for 15 out of the last 17 weeks, including the last 5). Increasingly risks of a US fiscal cliff as stimulus programs run out, with Republicans and Democrats wrangling over more stimulus and US Presidential elections will be added to the list of factors testing market resilience in the days and weeks ahead.
This week there are several key data and events including China June trade data (Tue), China Q2 GDP (Thu), US June CPI (Tue), US June retail sales (Thu), Australia June employment data and several central bank decisions including Bank of Japan (Wed), European Central Bank (Thu), Bank of Canada (Wed), Bank Indonesia (Thu), Bank of Korea (Thu), and National Bank of Poland (Tue). Aside from economic data and events the path of virus infections will be closely watched, especially in the US given risks of a reversal of opening up measures. Last but not least the Q2 earnings season kicks off this week, with financials in particular in focus this week. Low real yields continue to prove supportive for equities and gold, but very weak earnings could prove to be a major test for equity markets.
On the data front, Chinese exports and imports likely fell in June, but at a slower pace than in the previous month, China’s Q2 GDP is likely to bounce, while US CPI likely got a boost from gasoline prices, and US retail sales likely recorded a sharp jump in June. Almost all of the central bank decisions this week are likely to be dull affairs, with unchanged policy decisions amid subdued inflation, although there is a high risk that Bank Indonesia eases. The EU Leaders Summit at the end of the week will garner attention too, with any progress on thrashing out agreement on the recovery package in focus. Watch tech stocks this week too; FANGS look overbought on technical including Relative Strength Index (RSIs) and more significantly breaching 100% Fibonacci retracement levels as does the Nasdaq index, but arguably they have looked rich in absolute terms for a while.
There has been plenty of focus on the rally in Chinese equities over recent weeks and that will continue this week. Last week Chinese stocks had their best week in 5 years and the CSI 300 is up close to 19% year to date. Stocks have been helped by state media stories highlighting a “healthy” bull market, but the rally is being compared to the bubble in Chinese stocks in 2014/15, with turnover and margin debt rising. At that time stock prices rallied sharply only to collapse. However, Chinese equity valuations are cheaper this time and many analysts still look for equities to continue to rally in the weeks ahead. China’s authorities are also likely to be more careful about any potential bubble developing.