Everything is looking a little flat in financial markets on Thursday, with most of Europe seeing small gains and US futures a mixed bag ahead of the open.
The week’s big data release gave the markets a small bump on Wednesday as it took some of the pressure off the central bank even if it doesn’t change its plans around tapering. Inflation being transitory is crucial to tightening of monetary policy is done in a gradual way and the CPI numbers aligned with the Fed’s narrative around price pressures this year.
It’s looking a little light on the data front for the rest of the week, with today’s PPI number the only remaining release of any real significance. The data yesterday was encouraging but any signs here that it was a blip could unwind all of yesterday’s good feeling and replace it with anxiety once more. Should the data offer further comfort on the other hand, equities could catch another bid and take further pressure off US yields and the greenback.
UK sees strong growth during the second quarter reopening
The UK economy is almost back to its pre-pandemic size after growing 4.8% q/q in the second quarter, leaving it only 4.4% below its peak in Q4 2019. While there was a slight downward revision to the Q1 figure and a small miss on industrial and manufacturing production, the data was very encouraging overall.
Strong growth in the second quarter was driven by consumer spending as lockdowns eased, with services output rising strongly in June ahead of the final restrictions being dropped in July. This bodes well going into the third quarter and the July number next month will be very interesting indeed, as the UK moves ever closer to fully closing the gap on lost output during the pandemic.
The country is now in a very strong position going into the end of the year and next. Of course, this is contingent on the removal of restrictions not coming back to bite the government as infections rise. But early signs are promising with the high take-up of vaccines meaning higher caseloads are not leading to nearly the same levels of hospitalizations and fatalities as before. Of course, the Autumn and Winter months bring their own challenges.
The pound initially dropped following the data release, probably as a result of q/q GDP being in line and manufacturing and industrial production missing, but it quickly rebounded to trade back around the pre-release levels. While challenges remain for the UK, the pound could benefit from the continued recovery in the months ahead.
Oil bounces back despite white house plea to OPEC
Oil prices are continuing to recover after a choppy session on Wednesday after the White House attempted to weigh in on OPEC+ output. Reports yesterday that President Biden wants the group to increase the pace at which it pares back production cuts initially sent crude prices lower, having only just rebounded off its lows earlier this week.
Prices did rebound a little later though, with a softer dollar on the back of the US inflation data contributing to the rebound. Despite the initial knee-jerk reaction, traders may also have come to the conclusion that Biden won’t hold much sway in the group’s decision-making, even if his comments do perhaps embolden some members that would like production to ramp up faster than the 400,000 barrels every month that was previously agreed.
But those discussions would likely have taken place anyway as the recovery gathered speed and prices remained high. The group is used to the White House attempts to pressure the group after four years of dealing with President Trump. This is nothing new and is unlikely to have any considerable impact on their output targets.
The result is that crude prices remain range-bound, with WTI seeing a broad $65-75 range and Brent $67-77. That range may narrow in the coming weeks but it seems rising delta cases around the world has temporarily put a ceiling on the rally.
Gold enjoying brief relief
Gold is enjoying some light relief after events of the last week saw the yellow metal spiral out of control on Monday. It has since bounced back, aided by the softer inflation reading on Wednesday and a slight easing of US yields and the dollar. The result is it finds itself back around $1,750 where it spent some time back in June.
Unfortunately, this time it’s the wrong side of that support line that is now providing a barrier of resistance to golds recovery. While the inflation data took the pressure off, it doesn’t change much as far as the Fed is concerned. Of course, it could have become much worse if the CPI data had gone the other way, hence the relief rally, but tapering is still coming and I don’t think the data changes anything as far as it is concerned.
Today’s PPI data may get things moving again as gold tries to push back above that $1,750 resistance. A higher than expected number could see it tumble once more though.
Bitcoin seeing temporary resistance
Bitcoin is slightly lower on Thursday, having stalled in the middle of the week following strong rallies this month. The 50 fib level – April highs to June lows – is putting up a bit of a fight as resistance, although I don’t think it will keep the crypto bulls at bay for much longer. This rally has some real momentum and I think we’re just seeing some brief profit taking.
We’re not seeing it gather any momentum to the downside although, if it does edge lower, it could see support around $42,500, which is prior support and resistance and the 38.2 fib. A move through $47,000 will see attention shift to $50,000-51,000 region where past support and resistance combines with the 61.8 fib. The psychological factor could also come into play around these big levels.
