While the Nasdaq and the S&P 500 set new records last week, the Dow and Russell 2000 lagged behind somewhat, as did European markets although the FTSE 100 was able to reverse all of the previous week’s losses.
As we head towards the end of the month and the end of the quarter it is notable that so far in 2021 equity markets look set to complete 5 successive months of gains, since the modest losses seen in January, with markets here in Europe set for a quiet start this morning, with Asia markets subdued and Hong Kong markets delayed by a rainstorm warning.
It would appear, on the face of it that investors have recovered some of the confidence that was briefly lost in the immediate aftermath of the most recent Federal Reserve policy decision, although there has been a notable change in the shorter end of the yield curve, with both two-year and five-year yields pushing sharply higher, with the rise in the two-year yield particularly notable, moving up to its highest levels since late March 2020.
The brief spike in the US dollar that we saw in the aftermath of the Fed policy decision appears to have subsided as concerns about the timeline of US monetary policy were assuaged last week by Fed chair Jay Powell and New York Fed president John Williams. The overarching narrative coming out from this week’s events is that while the likes of St Louis Fed's President Bullard, and Dallas Fed's Robert Kaplan have a view on how the Fed will need to act in the coming months, it is the views of the holy trinity of Jay Powell, Richard Clarida and John Williams that probably carry the most weight, and for now the Fed is not changing anything.
One other thing that came from last week's comments by John Williams was a concern about the labour market and the lack of a rebound in the participation rate, despite record vacancy rates. If Williams is concerned about this, he is unlikely to be the only one, which makes this week’s US jobs report even more important, when it comes to trying to read the reaction function of Fed officials in the coming months. Williams is due to speak again later today at a virtual panel hosted by the Bank for International Settlements.
The pound had a disappointing end to the week on Friday after the Bank of England’s surprisingly dovish message caught a lot of people unawares. There had been an expectation of a slightly more positive spin, even taking into account the disappointment that restrictions weren’t eased as expected on 21 June. There doesn’t appear to have been much reaction to the resignation of UK health secretary Matt Hancock over the weekend, and his replacement with former chancellor of the exchequer, Sajid Javid. This is probably on account of the fact that nothing much policy wise is likely to change, with the next deadline of the 19 July the next key date to focus on. There is little to no chance that the 5 July date being mooted as a possible earlier date will happen given current rising infection rates in the north of England, and the government’s current cautious approach.
EUR/USD – continues to remain fairly well supported above the 1.1850 area, with the 200-day MA at 1.2000 the next obstacle to a move higher. The key reversal from last Monday needs confirmation on a move through 1.2000 towards 1.2080. Below 1.1840 suggests a move to the 1.1704 level.
GBP/USD – still feels like it wants to go higher, with the 1.4000 level the key resistance. A break above 1.4020 opens up a move towards 1.4130. We have support at 1.3870. A break below 1.3780 suggests the potential for a move back to 1.3670.
EUR/GBP – rallied back to the 0.8600 level at the end of last week, but failed to push on. While below 0.8600 level the bias remains for a return to the 0.8530 area, and last week’s low. Below 0.8530 opens up the 0.8480 level.
USD/JPY – finding resistance just below the 111.20 level for now, which could see a move back towards 110.20 in the interim. Uptrend remains intact while above the 110.00 trend line from the lows this year. A move below this support opens a move back towards the 108.60 area.
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