By Han Tan, Chief Market Analyst at Exinity Group
The surge in risk assets appears to be on a mid-week break. US equity futures were holding steady Wednesday after the S&P 500 and the Nasdaq posted fresh record highs thanks to ample buy-the-dip action.
Asian stocks were mixed after the rebound in Chinese tech stocks petered out. The dollar index (DXY) was resting around the 93 line, while gold has moderated back into sub-$1800 territory.
Traders and investors worldwide may have to wait until Friday before sending asset prices on their next big move, with Federal Reserve Chair Jerome Powell’s speech eagerly awaited as the next big potential catalyst.
Should he lean closer towards his more hawkish colleagues on the FOMC suggesting that the Fed’s tapering will happen sooner rather than later, the DXY could push onto fresh year-to-date highs and the 94 handle for the first time since November.
However, if Powell sticks to his message of patience, we may see the dollar unwind more of its recent gains while boosting stock markets, as equity bulls continue to gorge on the Fed’s stimulus.
US data still a major influence on investor sentiment
If Jackson Hole proves to be a non-event, then market attention could be swayed by the incoming US economic data, with the latest readings on jobless claims, personal income and spending, as well as the Fed’s preferred inflation gauge all due in the coming days.
In the absence of any discernable policy hints from Powell this week, investors and traders will take bigger cues from the latest figures as they portend to the Fed’s next policy move.
Strong data that pushes markets into thinking that the tapering has to happen sooner rather than later, might reinvigorate tailwinds for bond yields and the dollar, at the expense of commodities and stocks.
Oil bulls contend with Delta variant concerns
Oil prices are taking a slight breather after the sharp rebound earlier this week, while the steadying US dollar is also giving oil bulls reason to pause. Still, oil futures have yet to break out of the series of lower highs since the start of July.
Demand outlook has to turn more optimistic and overcome the persistent concerns surrounding the coronavirus Delta variant in order for prices to unwind recent losses and claim a higher high.
Markets need to be shown more signs that demand can truly absorb any incoming OPEC+ supply, with the alliance set to make a key decision on output next week.
Much of the uncertainty surrounding the supply-demand equation lies in whether the Delta variant’s spread can be contained in major economies. The lockdowns in China, Australia and New Zealand have all shown that oil markets have to stay vigilant over the stubborn threats posed by Covid-19 on the demand recovery picture.
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