A week ago today, markets lurched sharply lower on concerns over the effect rising infection rates, along with big increases in the numbers of people self-isolating, might have on the economic recovery story.
Not only was the story a UK-specific story, but there was also clear evidence that the Delta variant was and is running riot overseas, and in Asia specifically, where vaccination rates are still a lot lower than in the UK and US, and where countries are reimposing restrictions and lockdowns across the board.
These concerns over rising cases, on the face of it, lasted less than a day as far as markets were concerned, with Tuesday marking the first day of a four-day rebound which saw the Stoxx 600, as well as the Dow, S&P 500 and Nasdaq all hit new record highs.
While none of these worries have gone away, as investors balance up the pincer-like concerns of rising inflation and slowing growth, the benefit of the doubt appears to be leaning towards a recovery slowed, rather than one stopped in its tracks, largely as a result of companies beating expectations as they report on how business is going.
The upside to this mindset is that central banks are unlikely to be in a rush to look at imminently curtailing their bond buying or asset purchase programmes, let alone raising interest rates.
As we look ahead to this week’s key events, uppermost in investors’ minds will be the US Federal Reserve rate meeting, which starts tomorrow, and where speculation about a discussion on the tapering of asset purchases, and a possible timeline is likely to be top of mind.
It is also set to be another busy week of earnings reports as the big tech giants report their latest quarterly numbers. These are especially important given that these tech companies have predominantly driven the moves higher in US markets to recent record highs, and investors won’t want to see any signs of a paring back of guidance expectations over the rest of the year. Starting with Tesla later tonight, we can also look forward to the numbers from Apple, Amazon. Alphabet, Facebook and Microsoft, along with a host of other high-profile names throughout the week.
As far as today is concerned the slate is fairly light with only the latest German IFO business climate survey for July. Expectations are for an improvement across the board, however its unclear whether the flooding in Germany might have had an effect on any parts of this business survey. It would be surprising if recent events hadn’t had an effect on sentiment, given the huge amounts of damage to the economic infrastructure caused by the floods.
On the currencies front it's also set to be a big week for the US dollar, which has seen some decent gains in the past week and month, with the US dollar index hitting a three-month high last week, on expectations of diverging central bank policy. Last week the ECB more or less confirmed it wouldn’t be altering monetary policy for the next three to five years, and while that has made some on the governing council less than happy, there doesn’t appear to be the appetite there for the moment to push back too strongly against it.
Today’s European open looks set to be a soft one, with Asia markets starting the week mixed on the back of weakness in Chinese stocks which have fallen sharply after a crackdown by Chinese regulators on its tech and education sector. The Nikkei, on the other hand is higher as it plays catch up after a two day break at the end of last week.
One key takeaway from last week’s volatility is that while we’ve seen US markets rebound strongly from last Monday’s lows, individual markets here in Europe have underperformed, with the FTSE 100 a particular laggard. That might change this week when we get the latest numbers from the likes of Rio Tinto, Glencore, Royal Dutch Shell and the UK banks, Barclays, Lloyds and NatWest.
EUR/USD – the 1.1750 level continues to hold firm, but the lack of rebound is concerning. A break lower has the potential to target the March lows at 1.1710, with last November’s low at 1.1610 the next key support. We need to see a move through the 1.1880 level to signal a move to the 1.1975 area.
GBP/USD – found decent support above the 1.3570 level last week, which was also the February lows. We need to see a recovery back above the 1.3800 level to stabilise, and target a move back to 1.3900, and minimise the risk of further losses.
EUR/GBP – ran into resistance at the 0.8680 level last week, and has since slipped back towards the recent lows. We now need to see whether the recent lows at 0.8520 hold for signs of further weakness, towards 0.8480.
USD/JPY – after finding support at the 109.00 area last week, we need to see a move through the recent highs at 110.65, to target a move back to the 111.65 area.