[Market Review].
The dollar index pulled up strongly. The dollar posted its biggest gain in nearly two weeks as falling U.S. stocks and risky assets spurred risk aversion, and was not affected by falling U.S. bond yields. Earlier, data showed that U.S. service sector activity slowed in June, and the new orders and business activity indexes also retreated, although this had little impact on the dollar index. The Delta mutant strain has spread to all 50 U.S. states and needs to be watched for a resurgence of the outbreak, which in turn pushed up safe-haven buying of the dollar. On the infrastructure front, a bipartisan group in the U.S. House of Representatives supported the $579 billion infrastructure deal reached by Biden and called for a vote as soon as possible.
Gold surged higher and retreated. Risk aversion pushed gold prices higher, with gold breaking above $1,815 intraday, but the dollar index strengthened, forcing gold prices back below 1,800. Investors are watching the minutes of the latest Federal Reserve policy meeting to judge the trend of interest rates. Some analysts point out that central banks are trying to dispel the idea of premature interest rate hikes. Investors recognize that monetary policy will remain at a very accommodative level, which is one of the reasons for the decline in U.S. bond yields, which helped gold prices stabilize after a sharp decline in June.
The euro fell to a three-month low. The euro fell to a three-month low against the dollar after disappointing data released in Europe. the ZEW Institute for Economic Research reported that investor confidence in Germany remained at a high level, but fell sharply in July. Meanwhile, data showed that German industrial orders in May saw the biggest drop since the first blockade in 2020, and a drop below 1.1800 would continue the slide toward March’s quarter-end low of 1.1700. ECB policymakers are discussing a new strategy, with many now supporting the idea of allowing inflation to exceed 2% for some time, a level below which inflation has been below for most of the past decade.
The pound hovered at 1.38. The dollar was strong, with the pound falling below 1.38 against the greenback at one point. The market is expecting the U.K. to become the first major country to officially begin accepting the presence of the New Crown virus after two weeks, when restrictions related to the outbreak are lifted. This could subsequently push the pound higher.
The Australian Federal Reserve held its ground. The Australian Fed announced its interest rate resolution yesterday, announcing the continuation of the April 2024 bond as the target bond for the 3-year Treasury yield, leaving the 3-year yield target unchanged at 0.1%, while stating that bond purchases will continue at a rate of A$4 billion per week until at least mid-November after the current bond purchase program is completed in early September.
Crude oil plunged. Oil prices fell sharply on Tuesday, hitting the biggest drop since the end of May, with crude oil once falling nearly 4% during the day. The reason may be that a stronger dollar has spurred a broad-based sell-off across commodity markets, while uncertainty surrounding OPEC’s next move is also growing. Separately, Saudi Arabia raised the official selling price of all crude oil sold to the U.S., Europe and Asia in August. In particular, Saudi Arabia raised the price of Arabian Light crude oil sold to Asia in August by 80 cents per barrel.
Risk Warning]
The probability of the U.S. economy overheating is extremely small, and no reduction will be announced before December
Goldman Sachs chief economist predicts that the global economy will grow 6.6% this year and 4.8% in 2022. On the bright side, the U.S. labor market is accelerating, corporate executives in Europe are becoming optimistic, and global vaccinations have reduced the number of new crown deaths. On the bad side, U.S. demand growth is slowing, labor shortages are affecting production and the Delta mutant strain is starting to spread. Goldman Sachs economists said the U.S. economy is unlikely to overheat because growth will slow as vaccination restrictions lift and fiscal support wanes, and the Fed is unlikely to announce a tapering of its bond purchase program until December.
The UK will ease restrictions on the European pound or down to 0.8
Bank of Tokyo-Mitsubishi UFJ pointed out that the British government’s gradual learning and response to the new crown virus approach to provide support for the pound. British Prime Minister Johnson announced that the government plans to advance the last phase of the new coronavirus restrictions easing on July 19, after the plan was delayed for four weeks, which was the main reason for the pound’s early week gains. The plan to open the British economy more fully will lead to a significant increase in new coronaviruses, but the government believes that the British health care system, can better handle the previous outbreaks. Allowing the British economy to open up more fully supports a bullish outlook for the pound. Because the British economy will recover more strongly in the rest of the year, Mitsubishi Bank expects the euro to fall to 0.8 against the pound.
Central bank may gradually tighten policy U.S. and Canada is expected to break 1.26
The dollar was strong against the Canadian dollar yesterday, rising to 1.2495 at one point, as the Bloomberg Commodity Index fell as much as 2.5%, the biggest drop since June 17; the pair’s surge suggests traders closed out short positions built earlier this year. Strategists at Canadian Imperial Bank of Commerce said many central banks are now tilting toward tightening, which will reduce support for economic growth, and expect the dollar to move toward an area of 1.2630 to 1.2640 against the Canadian dollar.
[Key Outlook].
Thursday 02:00 focus on the Fed minutes on the QE statement
Tomorrow morning, the Fed will release the minutes of its June meeting, further elaborating on the detailed insights of Fed members on the economic situation, rate hike expectations and QE tapering issues. Because the past few weeks, the Fed members have been on the policy shift, more elaboration, the market can be extracted from this report, enough to shake the market logic of the information point is more doubtful.
You can pay attention to whether the minutes mentioned that officials discussed the speed of QE cuts, as well as how to allocate on the Treasury and MBS bond purchase program and other details.
The market doesn’t know much about these details at the moment, so these are potential market triggers as well. The more details they discuss, the more likely it is that action will be taken sooner. For now, Fed watchers generally expect the Fed to announce more details about tapering its bond purchases during its annual symposium in Jackson Hole. It will then begin slowing purchases later this year or early next year.
But investors need to be wary of a shock to the market similar to the April FOMC minutes. After the April rate resolution conference, Powell himself said there was no discussion of QE tapering, but the minutes show that “several participants” said that if the economy continues to make rapid progress, it would be appropriate to start discussing tapering bond purchases at the upcoming meeting.
Thursday 04:30 API crude oil inventories fear continued decline
Next, let’s focus on API crude oil inventories. Last week’s API report showed that U.S. crude oil inventories decreased by 8.153 million barrels. The EIA crude oil inventories released later decreased by 6.718 million barrels. In addition, U.S. Midwest oil inventories fell to their lowest level since February 2020. As crude oil prices continue to rise, U.S. crude oil production remains surprisingly self-contained.
By the end of the week the market expects that U.S. API crude oil inventories may decrease by 3.925 million barrels for the week ending July 2. If the published value is larger than expected, oil prices may come under pressure; conversely, oil prices may rise.
In addition, you also need to pay attention to the OPEC side of the dynamic, despite the OPEC General Assembly talks collapse, August will not increase production. But do not rule out the UAE or Saudi Arabia to make concessions, and the United States is also mediating in which it is hoped that OPEC + members can return to the negotiating table to negotiate an agreement on increasing production, once there is a party concessions, oil prices may face the risk of downside.
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