The three major US indices closed Thursday’s session in the red, and most Asian indices traded south on Friday on rising Covid concerns after Japan released a state of emergency just two weeks before the start of the Olympic Games. There will be no spectator, but the games will happen according to the latest news. Here in Europe, it’s hard to believe that the cases are rising again, as the Euro2020 spectators are by thousands in the stadiums with no masks or visible distancing measures. So, it naturally raises some questions about the possibility of a Delta variant crisis knocking at the Europeans’ door as well.
EuroStoxx slid more than 2% on Thursday, closing the session below the 4000 mark for the first time in three weeks, while German industrial orders showed an unexpected slump in May, the worst recorded since the beginning of the pandemic due to weaker demand outside the Eurozone, hinting that the vaccine rollout may not help the European economies keeping their head above water in case of a renewed global contagion.
But activity on European and UK futures hint at a slightly positive start on Friday. Rebound in oil prices and weaker British pound could keep the FTSE 100 above the 7000p mark before the weekly closing bell. Yet the waning reflation winds will likely pressure the bank and energy-heavy blue-chip index to lag behind its US and European peers in the coming weeks.
Chinese tech stocks, on the other hand, continue feeling the pinch of the Chinese government crackdown. Alibaba dived below the $200 mark for the first time in more than a year, Didi lost another 5%. Chinese tech stocks are like the forbidden fruit. Foreign investors are dying to take a bite, but China commands them not to eat it.
But despite the discouraging Covid developments, there is no apparent reason for the US equity prices to come down significantly, or the bubble to burst, as the US yields remain comfortably on a fading path. The 10-year yield slumped below 1.30% this week, hinting that the Fed’s dot plot showing a steeper rate hike path, or the warnings of higher and longer inflation are no cause for concern with regards to the Fed policy. The market rhetoric is clearly shifting from transitory inflation to transitory recovery, and that’s probably what keeps the inflows in US treasuries elevated, combined with a seasonally low issuance of treasuries in July and Fed coming back to the market after the July 4 break. As such, falling treasury yields and rising equity prices is the most reasonable market reaction, although it’s worth noting that this time, the rising Covid concerns are also accompanied by rising Covid cases.
But you would agree that no analyst would dare giving a bearish call on the market right now, as the excess liquidity is what runs the show.
In commodities, gold has a solid rebound since the price dipped at $1750 end of June, and the price of an ounce tested the $1820 level yesterday. The plunging US yields explain a major part of the latest return to gold, as lower yields decrease the opportunity cost of holding the non-interest-bearing gold. Technical indicators hint that there is potential for a further positive push in gold prices at the current levels. The trend and momentum indicators turned positive at the beginning of this week and the relative strength index is still below the 50% mark, pointing that we are not close to a saturation on the buy side, yet. However, knowing how profitable the risk trades are, how long would investors remain seated on not-so-exciting gold is yet to be seen. The upside potential will likely remain capped into the 200-day moving average, near the $1830per oz, if there isn’t a significant bearish reversal in the US equity markets.
US crude, on the other hand, dipped below $71 mark this week, yet rapidly rebounded past $73 after the EIA data showed a further and a more severe-than-expected decline in US inventories last week. Comparing these numbers with the amount that OPEC+ is willing to unwind its production cuts by, meaning by less than half-a-million barrels, we have a clearer idea on what direction the price is headed. However, the chaotic situation at the heart of OPEC, the rising tensions between Saudi and the United Arab Emirates, the possibility of a nuclear deal between the US and Iran – which would throw an extra 4-to-6-million-barrel supply per day to the global mix, and the rising Covid cases will likely limit the upside potential in US crude near the $75-78 per barrel area. The downside potential depends on what happens on the OPEC front. The base case scenario is that OPEC countries will work out a solution and prevent oil prices from falling free. Therefore, oil bulls will likely remain in charge above the $70 mark, but we will hardly see the barrel of US crude surpassing the $80 mark until there is more certainty on the Covid news front.
