Market Cross-Currents

July 26, 2021 — Mitul Kotecha

There are many cross currents afflicting markets at present.  Equity valuations look high but US earnings have been strong so far, with close to 90% of S&P 500 earnings coming in above expectations. This has helped to buoy equity markets despite concerns over the spreading of the Delta COVID variant and its negative impact on recovery.  Yet the market doesn’t appear entirely convinced on the recovery trade, with small caps continuing to lag mega caps. 

The USD index (DXY) remained supported at the end of last week even as US yields remain capped, but the USD does appear to be losing momentum. Positioning has now turned long according to the CFTC IMM data indicating that the short covering rally is largely exhausted; aggregate net USD positioning vs. major currencies (EUR, JPY, GBP, AUD, NZD, CAD & CHF as a percent of open interest) turned positive for the first time in over a year. 

Inflation fears have not dissipated especially after recent above consensus consumer price index (CPI) readings, for example in the US and UK.  Reflecting such uncertainty, interest rate market volatility remains high as seen in the ICE BofA MOVE index while inflation gauges such as 5y5y swaps have pushed higher in July.  There was some better news on the inflationary front at the end of last week, with the Markit US July purchasing managers indices (PMIs) revealing an easing in both input and selling prices for a second straight month, albeit remaining at an elevated level. 

This week we will get more information on inflation trends, with the June Personal Consumption Expenditures (PCE) report in the US (Fri), Eurozone July CPI (Fri), Australia Q2 CPI (Wed) and Canada June CPI (Wed), on tap this week.  We will also get to see whether the Fed is more concerned about inflation risks at the Federal Open Markets Committee (FOMC) meeting (Wed).  The Fed is likely to continue to downplay the surge in inflation, arguing that it is transitory, while the standard of “substantial further progress” remains a “ways off”.   Nonetheless, it may not be long before the Fed is more explicit in announcing that is formally moving towards tapering. 

An emerging markets central bank policy decision in focus this week is the National Bank of Hungary (NBH) where a 15bp hike in the base rate is expected.  Central banks in emerging markets are taking differing stances, with for example Russia hiking interest rates by 100 basis points at the end of the week while China left its Loan Prime Rate unchanged.  The July German IFO business climate survey later today will be in focus too (consensus 102.5).  Overall, amid thinner summer trading conditions market activity is likely to be light this week.

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The Week Ahead

January 24, 2021 — Mitul Kotecha

This week the difficulty of trying to pass President Biden’s $1.8tn stimulus package through Congress is likely to become increasingly apparent.  Many Senate republicans are already balking at the price tag and contents, adding more weight to the view of an eventual passage of a sub $1tn package of measures (see my explanation of why Republican support is needed). One of the most contentious issues is likely to be a federally mandated $15 minimum wage. 

At least, the Senate won’t be juggling the impeachment of Donald Trump, at the same time as debating administration nominations and President Biden’s fiscal proposal, with the impeachment trial now scheduled for the week of February 8.

The contrast between US and European data at the end of last week was clear in the release of Markit purchasing managers indices (PMI) data.  US PMI’s registered strong flash readings for January, with both the manufacturing and services indices rising while in contrast the Eurozone composite PMI fell in January, sliding further into contraction.  A disappointing UK retail sales report highlighted the pressure on the UK high street too. 

The reality is that many developed economies are struggling into the new year, with a sharp increase in virus cases including new variants, slower than hoped for rollout of vaccines, and vaccine production shortages, all pointing to a later than expected recovery phase. 

This week, the Federal Reserve FOMC meeting (Wed) will garner most attention in markets. A few Fed officials mentioned tapering recently, clearly rattling markets, as memories of the 2013 “taper tantrum” came back to the surface.  After tamping down on any taper talk Fed Chair Powell is likely remain dovish even as he expresses some optimism on growth.  Growth in Q4 will have looked weak and US Q4 GDP (Thu) will be in focus, with most components likely to have slowed.  A plethora of earnings releases will continue this week including key releases from the likes of Microsoft, AMD, Tesla, Apple and Facebook. 

A dovish FOMC will do no favours for the US dollar (USD), which came under renewed pressure last week.  However, risk assets appear to be struggling a little and should risk appetite worsen it could boost the USD, especially given extreme short positioning in the currency. Emerging Market currencies will be particularly vulnerable if any rally in the USD is associated with higher US real yields. 

Posted in Asia, Asian currencies, Biden, Bond markets, central banks, coronavirus, COVID-19, Currencies, ECB, Economics, Economy, emerging markets, equity markets, Europe, eurozone, Federal Reserve, Fiscal/Budget, Interest rates, Monetary Policy, Politics, Trade, Trump, US, US administration. Tags: , , , , , , , , , , , , , , , , , , . Leave a Comment »