European markets had a disappointing day yesterday, sliding sharply while US markets also had another poor session, falling for the third day in a row, although a late rebound in cryptocurrencies helped US markets close well off their lows of the day.
There were a number of different elements to yesterday’s slide in equity markets, the highest profile of which appeared to be concerns over a more activist approach from Chinese regulators towards cryptocurrencies as well as commodity prices, which prompted big declines in both. This saw ethereum plunge 40% at one point and bitcoin fall at least 30% before both rebounded, with bitcoin now back close to $40,000, after hitting a low of $30,000 at one point yesterday.
As a consequence of last night’s late rebound, markets here in Europe look set to open higher, with investors seemingly caught in a no-man's land of indecision between optimism over the economic reopening, and concern over central banks acting too late to address an inflationary surge.
One of the narratives driving yesterday’s losses was concern that the US Federal Reserve’s apparent lack of urgency over inflation could mean that it might be too late in the event prices suddenly start to run away to the upside. The hope was that yesterday evening’s minutes might offer further clues towards the Fed’s thinking when it comes to tapering their asset purchase programme, as well as the timing of a possible rate rise. So, what did we learn from the minutes that we didn’t already know? It depends on who you talk to, but to say what the Fed was thinking at the end of April, prior to the sharp slowdown in the April jobs report, is still relevant now is a bit of a stretch to say the least. On the one hand you have a school of thought that the Fed isn’t being proactive enough to concerns over rising prices, and then on the other there is a concern that the Fed might tighten too early.
Either way the Fed can’t win, but what we do know, and up until recently the market was quite comfortable with this, was the fact that the Fed would be very much data driven. That the Fed is data driven doesn’t appear to have changed, however the markets attitude to what the Fed might do next certainly has. The easy money stance now appears to be attracting some concern that the Fed might allow the inflation genie to get out of the bottle. The irony is that at a time when we’ve seen big spikes in annual headline inflation due to surges in commodity prices, is that commodity prices appear to have topped out.
The minutes did show that a number of participants were in favour of being more proactive in terms of tapering if the economy continued to make rapid progress towards the committee's goals, which appears to be an eminently sensible stance to take. There certainly is a concern that inflation might start to run away, and early indications do suggest that some of the recent big price increases are more than simple base effects, after the sharp declines last year. We are still a long way away from that, and while we have seen some companies start to raise salaries to try and attract workers, the biggest problem the US economy has right now in filling the growing number of vacancies is the high level of unemployment benefits which discourage workers from returning to the workforce.
As we look ahead to the autumn, it still seems likely the Fed will taper its $100bn a month bond-buying programme, assuming the US economy remains on track, and the market shouldn’t fear that, as it would suggest that the recovery is taking place. US 10-year yields certainly appear to be leaning in that direction in the wake of the minutes, however there is still a lot of data to parse between now and then.
Today’s main focus will be on the latest weekly jobless claims numbers, which are expected to come in below 500,000 for the second week in succession, down from 473,000 to 453,000.
EUR/USD – ran into some resistance at the 1.2250 area yesterday, matching the peaks seen at the end of February. The failure here opens up the prospect of a move back towards the 1.2040 level. The 1.2345 level remains a possibility while above 1.2040, however a break below that suggests the 1.1980 area.
GBP/USD – may well have seen a bearish reversal yesterday after failing above 1.4200. This failure could see us slip back towards the 1.4020 level. We need to see a move through 1.4250, to open up the 2018 peaks at 1.4375. A move below 1.4000 opens 1.3920.
EUR/GBP – tried and failed to break above the 0.8640 area drifting back, with the potential to slip back towards the 0.8560 area on a break below 0.8600. Above 0.8640 opens up the prospect of a move towards the April highs at 0.8730.
USD/JPY – rebounded again off the trend line support from the January lows yesterday at 108.50. We need to get back above 109.80 to kick on towards 111.00. A move below 108.00 opens up the prospect of a move back towards 106.80.