As we move into the summer months, there’s a jam-packed calendar of market impacting events.
Arguably the week's highlight is the EU summit on Friday, where leaders will gather to discuss the recovery fund. We’ll also hear from the ECB, Bank of Japan, and other central banks as they make their latest monetary policy decisions. Meanwhile, earnings season begins to kick off next week, including many US financials reporting, and economic data includes China's Q2 GDP reading,
Despite China’s stock market correction lower on Friday, the Chinese authority's carte blanche endorsement of risk assets should continue to resonate. Not unlike the US equity market, the tail wags the dog with retail buying pulling in institutional flows as the long-awaited pull-back fails to materialize.
Although China authorities have one foot on the accelerator and the other tapping the brake, the mainland's policy pivot appears set in stone, targeting both investment and economic growth recovery by leveraging the financial markets. Unlike the west, which relies on government support schemes, private investment is a more direct and quick way to recover, so China should continue to exert a lead foot on the gas pedal.
However, outside of the China stock market frenzy volumes across asset classes dropped as mobility trends moderate and a complicated earnings season lies ahead; the disparity in sell-side estimates are at staggering record "wides."
All of which has the makings of a complex week for the markets. And after and an uptick in risk sentiment out of the gates this morning, trading flows are meandering aimlessly due to number of factors, earnings season notwithstanding.
Volumes continue to remain challenged due to summer holidays, more abundant catalysts being backloaded this month, and earnings season about to kick off.
Will the market see through earnings disappointments again, or will fundamentals return? Will we see extreme positioning drive market lower if some names are hurt? A lot of questions remain but there are few answers.
We should get a better view of the earnings narrative the market wants to take regarding earnings moves from US financials reporting this week – it should be interesting, especially given the relative performance of the sector is so weak.
I don’t think there’ll be any way to sugar-coat a disastrous Q2. Still, I’m not sure how significant the numbers will be, given the premise that investors are paying a top premium for technology stocks based on 2021 rebound earnings. Not to mention money is flowing again into perceived 'safe plays' – probably also getting ready for earnings season. So, while some names could get hurt, the US indices are probably relatively safe as, for the most part, the safe bets rely more on the virtual economy rather than consumers physically showing up at shops.
Rising Covid-19 cases in the US do not have a market impact; Florida's rising new case count over the weekend takes its 7-day average (14.4k) close to the peak for New York on April 4.
Gold has experienced a somewhat healthy correction after hitting a new high for the year at $1,818.
The thinking here was that long speculative positioning is still the primary consideration against being long XAU, so taking profits and leaving room to add on dips seems reasonable. The rally is still intact, but the market may need some breathing room and time to consolidate before punching higher.
Otherwise not much has changed: Covid-19 continues to be the primary catalyst, but any revival in the trade or geopolitical risk has the potential to float gold higher. On Friday, President Trump said that he’s not currently thinking about negotiating a "Phase 2" trade deal with China as relations between Washington and Beijing over the Covid-19 pandemic and other issues have soured.
The FX market is relatively quiet, with no significant developments to provoke a break out of recent ranges.
The China-led gains in equity markets faltered and continue to weigh in CNH in early trade this morning, while the G-10 seems to be taking its cue from the CNH in early trading. The Covid-19 pandemic continues to offer troubling headlines, which is keeping a safe-haven bid under the dollar.
The guideline expectations are that there will be a deal on the recovery fund at this meeting, but with the EURUSD only sitting perched at 1.1300, it remains a close call.
There’s much to be ironed out around the ratio of grants to loan to appease the so-called "frugal four" of the Netherlands, Austria, Sweden and Denmark, who are only showing support for loans, not grants. Their support for the fund will be necessary as it requires the unanimous approval of the member states.
OPEC and China data are also important
Besides the EU meeting, OPEC+ and China data are key this week as they present two colossal near-terms risks to the currency market.
The first risk event is an OPEC+ meeting scheduled for July 15. Saudi Arabia led a push in April that resulted in the group cutting its collective output by 9.7 mn barrels a day to support prices in the face of a collapse in demand. The group will decide whether to restore ~2 mn barrels per day as originally planned.
Second, the Q2 and June economic data for China could provide a roadmap for the rest of EMs post-Covid recovery.
Asia Oil: July could be a shaky month for oil, not least while OPEC+ tries to avoid a "taper tantrum
Oil prices recovered into the weekend, and if there was a glimmer of optimism for oil and the virus on Friday, it was the remdesivir news. However, despite the good news, it remains incredibly torturous digging out from under those US virus case counts that seem to be rising by the day.
Prices slipped lower in early Asia as traders turned their focus to the OPEC meeting of top producers this week, The meeting could put in motion the current agreement plans to begin scaling back the massive output cuts that have effectively stabilized markets. However, the challenge remains doing so without causing a "taper tantrum."
Due to the uptick in virus cases globally, which suggests oil markets remain a sick patient, will OPEC+ deliver just what the doctor ordered and provide one more month of wiggle room by extending the historical output cut? Or will we see the introduction of a backwardation target? Either option could be interpreted quite favorably for oil prices. The latter option would allow OPEC to scale in production gradually on a more quantified real-time measure rather than relying on rolling backdated metrics.
July could be a shaky month for oil. The recent surge in coronavirus infection numbers in the US and elsewhere have brought demand risk back into focus. The planned easing of OPEC+ production cuts next month after a one-month extension of the initial phase of the production cut plan and a potential rebound in US production could add pressure on the supply side of the equation. And when you factor in Libya lifting the force majeure, it adds another unwanted level of supply-side uncertainty at an extremely critical point in the oil price recovery phase.
Even medium-term oil bull zealots must give way to the markets’ short-term trading sensibilities and proclivities.
Trading ranges continue to narrow as exchange volumes dwindle. Yes, they’re summer markets , but they also reflect that no one seems to have much conviction on anything right now, and that creates a vicious circle. The more uncertainty grows, the less activity picks up as we remain stuck in the “only trade if you have to” environment. Moves that do occur tend to get magnified or blown out of proportion. The perfect example was the significant move down on Friday, despite the fact there had been something of a de-coupling of the market and pandemic effects of late. It doesn’t take much for the snowball effect to start in motion in thinly traded markets.
While the evidence suggests we’re past the trough for oil and that supply and demand are rebalancing, near-term headwinds remain as the short-term fundamentals are about as muddy as possible.
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US equities continue to welcome any high-risk event being put in the rear-view mirror – especially when rates markets look prime to consolidate lower