- European stocks dip on profit-taking
- Another quiet session in FX thus far
- BOC main event in the afternoon
- US CPI and ECB to follow on Thursday
The first three days of this week has been very similar, with range-bound price action dominating the agenda as investors await key macro events later in the week. Once again, European stocks indices have started the day lower with the US dollar being a little weaker along with bond yields. The likes of the GBP/USD and EUR/USD edged higher, with the former also supported by comments from BoE’s outgoing Chief Economist and hawk Haldane, who said the UK central bank needs to start turning off the stimulus tap. Keeping the stimulus tap wide open will undoubtedly be the European Central Bank on Thursday as Europe still struggles to come out of lockdowns.
Despite this morning’s weakness for European stocks, I still feel that sentiment towards stocks and other risk assets remains positive, and so today’s weakness could just be a normal retracement than a trend reversal. The fact that the dollar and bond yields have weakened after Friday’s publication of a weak US jobs report, this is a strong indication that concerns about inflation and tapering have been put on the back burner. Still, it feels like there is something missing – a spark – to get things moving again. Investors are awaiting bigger events later in the week. Hopefully, we should see some more lively action now that we are moving I the second half of the week, with some key events coming up in the next couple of days:
The Bank of Canada’s policy decision is due at 15:00 BST today with the press conference to follow half an hour later. No change in rates or asset purchases are expected after the BoC reduced their asset purchases in the previous meeting. The central bank’s future adjustments are going to be data-dependant. Over the past couple of months, employment from Canada disappointed expectations amid the return to some lockdown measures. Job postings still remain robust. With that in mind, the BOC is unlikely to reduce QE at this meeting, but may do so in July. However, if the BOC surprises with a hawkish-sounding policy statement or press conference, then the USD/CAD may finally drop to that 1.20 key handle after rates have spent the last 4 weeks in a tight range just above this level.
On Thursday, the European Central Bank is likely to quell any calls for early tapering of its bond purchases programme, and this could see European indices extend their gains. In so far as the euro is concerned, well paradoxically it has been reacting positively to dovish ECB decisions as the market has treated the single currency as a risk asset ever since March last year, along with nearly all other foreign currencies excluding the dollar. So, I wouldn’t be surprised if the EUR/USD were to go higher despite a dovish ECB meeting.
Also on Thursday, all eyes will be on US CPI inflation. CPI is expected to have climbed to 4.7% year-over-year in May, up from 4.2% previously, while core CPI is seen rising to 3.4% from 3.0% in April. On a month-over-month basis, CPI is seen rising 0.4% and core CPI is expected to print +0.5%. Unless inflation comes in well ahead of expectations, the Fed’s stance will not change materially, meaning equities could simply continue drifting higher until the FOMC meeting next week. But if we see a big reading, then inflation concerns could come back to haunt investors as this could raise speculation that price pressures are not going to be transitory. So, a lot depends on the outcome of the inflation report.
Ahead of the above macro events, US bond yields are continuing to fall, suggesting investors are less concerned about imminent policy tightening from the Fed, and if CPI comes in weaker on Thursday we could see more weakness for yields.
