Market News - Week Commencing 7th June

Monday 7th June 2021 – All eyes on Inflation

  Stock markets are on the defensive side overnight following a near record close on US equities On Friday, the Dow came within 1% of its 35,091 all-time high set on 10th May. And the broader S&P500 came just 5 points (0.1%) shy of its record. For now, investors are bullish about the outlook for the world’s largest economy... and about how the US central bank (the Fed) will support markets. Will that change? We’ll have to wait and see what unfolds this week… It’s likely that this week’s US inflation report will be keenly anticipated. That might put a dampener on the markets until it is released this Thursday. Over in the commodity markets, the oil price was weaker overnight. After a strong week last week for US crude (+5.4%), it pulled back around one dollar (1.5%) on Sunday night. Oil traders are waiting for talks this week between Iran and world powers about a nuclear deal that could release further crude oil supply to the markets in concluded positively. Which way these talks go could bring some extra volatility into the oil space – great news for those of us who like to trade it.   Review of last week’s key action FTSE +46 +0.67% DOW +227 +0.67% +26 +0.61% NASDQ +65 +0.48% DAX +173 +1.12% NIKKEI -776 -2.61% US equities jumped Friday following a weaker than expected Non-Farm Payroll report.  Despite reporting 559K new jobs, the report was still a miss on the consensus among leading analysts of 645K jobs. The conclusion, albeit likely temporary, was that this report made it less likely that the Fed (the US Central Bank) would be motivated to change guidance or reduce the $120 Bln monthly quantitative easing (QE) currently in place. In other words, interest rates aren’t likely to rise anytime soon, and the Fed will keep supporting the markets. That was enough to keep investors happy and buying stocks.   Stocks up, dollar down There had been a view recently that the US economy was in danger of overheating (which might lead to the Fed tightening monetary policy). But this notion has been quashed by the past two months’ weaker-than-forecast employment data. This did not get anywhere near the One Million new jobs that some economists were expecting in April. Other markets were also similarly affected.  Bonds enjoyed the same sentiment, with yield on the 10-year Treasury falling 7 basis points as prices rallied. Not surprisingly, the US dollar (USD) fell back on the news. That is because keeping current record low interest rates will not encourage investors into the USD. Back in the stock markets, it’s not just US equities that have been on a run. The Stoxx 600, the pan European Index, hit another record close Friday, as sentiment continues to go from strength to strength in the Eurozone  The German DAX also posted another record close.   EURUSD -0.25 -0.2% GBPUSD -0.3 -0.22% USDJPY -90.34 -90.3% In the currency (forex) markets, the US Dollar recovered a little lost ground last week but remains close to its weakest level this year, albeit in a particularly tight range. Sterling also trades within a tight range with both the USD and the Euro. Growth estimates for the UK this year are one of the highest in the G7 and investors remain confident in UK plc. Gold -13 -0.7% UK OIL +2.66 ++3.85% US OIL +2.70 +4.05% Bitcoin +1,178 +3.3% In the commodity markets, oil hit a multi-year high last week as it tracks the fortunes of the stock market. US oil touched $70 a barrel for the first time since October 2018. Gold has been showing signs of running out of steam. Last week’s move was also helped along by a slight recovery in the US dollar. With a weaker than expected employment report, will inflation be less of a worry? Sadly not. Markets remain nervous about inflation, and quite rightly so. We have had benign inflation for two decades or more so there is a generation of adults that have never known the destructive effects of persistently high inflation. Not that this is what is expected but the media are highlighting daily the jump in prices.   Last Thursday the FT put out a piece on Global Food prices, which have jumped alarmingly over the past month.   In fact, food prices in May jumped 40%, which is the biggest jump since 2011. The reasons are many but can be summed up by a post pandemic surge in demand. This is especially the case in China which, according to the FT, has been buying up grains and soyabeans in huge quantities.   Data / events for the week ahead A quiet week, as tends to be the case the week following US employment data. The highlights this week are US inflation and ECB monthly policy meeting.   Monday No significant data   Tuesday Ditto   Wednesday Canada interest rate decision. No change in rates expected from the Royal Bank of Canada (RBC) as Canada lags the US recovery. Commodity surge will underpin the Canadian dollar although, like others, Canada crosses remain becalmed for now. US Crude oil inventories. All eyes on Iran nuclear talks…   Thursday Eurozone ECB monthly policy meeting. The Eurozone economy continues to improve as lockdown measures are eased across the bloc. Unlikely there will be any change from the ECB. Inflation has jumped to 2% from 1.6% the previous month but, like other Central banks, the ECB expects this to be a temporary phenomenon and expects prices to ease back in July / August. US CPI – inflation data. Another jump could unsettle markets. Expecting core prices to slip back to +0.4% monthly rise. This would still propel the year-on-year rate to 4.7% compared to 4.2% in April. It’s the headlines that matter and markets will be sensitive to anything that overshoots this mark.   Friday US University of Michigan consumer sentiment. Sentiment fell last month but is expected to rebound as inflation nerves settle down a little. Good luck in the markets.