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Written by: Craig Erlam | OANDA
Another relatively flat session on Wednesday, with stock markets running out of steam a little after an impressive run over the prior week.
We've seen plenty more optimism in these markets recently. Covid numbers are finally improving, the vaccine rollout is making good progress and we're heading towards a strong recovery period that investors are increasingly optimistic about.
Stock markets have had a minor wobble at the start of the year, as you'd expect under the circumstances, but they're recovering well. This week it's all a little flat, with the thin data flow and lack of many other notable events. Earnings season is past its peak, although there are still some notable reports.
The main data release today was US CPI which fell a little short of expectations. Fears of a post-Covid spike will not change as a result of these figures but it may just be a case that another month without inflationary pressures is welcomed with a sigh of relief. We saw some positive movemen in US futures after the release but that was quickly reversed.
While the headline figure catches the eye, the Fed will be far more concerned with what is causing any spike in inflation and how permanent it is. It will be hesitant to react in a knee-jerk manner at a time when the economy needs all of the support it can get and the tweaks to its mandate will allow for that, as long as the desire to do so remains on the policy committee.
In the interim, investors may continue to get a little nervous if inflation does test the Fed's nerve this year and taper tantrum fears could return. The central bank has been keen to play down these risks but I imagine they'll be called upon over and over again in the coming year.
WTI eyeing $60 club
Oil prices are continuing to climb despite sentiment appearing to fade elsewhere. The softer dollar is offering some support to prices but I think this is still primarily being driven by increasing optimism about the economic outlook as vaccines are rolled out. Early setbacks were likely but progress is being made, as it is with the lockdowns and the proof is in the data.
Caution will still be adopted in the coming months due to the various new variants but this is the final stretch and many countries are well positioned for a turbo-charged recovery, maybe even a bumper summer as people burst free from their beautiful homes, after having nothing else to spend their money on for the best part of a year.
This should spur a surge in oil demand and kick start the turbo-charged recovery we're all dreaming of in the hope of preserving jobs and creating some for those less fortunate. It should be a strong second half of the year and oil prices are a reflection of that. Momentum remains with the rally so it may not be long until WTI joins Brent in $60 territory.
Gold buoyed by dollar pull back
A correction in the dollar has provided some welcome reprieve for gold over the last four days. The jobs report was the catalyst but can't be credited for the entire move. This was likely building prior to the release. The question is whether this is just a corrective move or something more excited for gold bulls.
At this moment in time, I'm in the former camp (correction). The dollar was on a good trajectory prior to the jobs report and had recently broken the neckline of an inverse head and shoulders which signaled a bullish outlook in the near-term. That hasn't changed, although a move below 90 in the dollar index may suggest the tide has turned.
As far as gold is concerned, the key level to the upside is $1,875, which was the peak on two rally attempts in January. A move through here would be a very bullish move and likely coincide with a move below 90 in the dollar index.
Bitcoin hanging on to Tesla gains
It's not been a bad week for bitcoin. It seems that one thing more powerful than Elon Musk's Twitter account is the financial power of the company he co-founded and leads. The decision by Tesla to invest $1.5 billion in bitcoin and announce it plans to accept bitcoin as payment was a massive win for the crypto crowd. Acceptance in the business and financial community is what they've long sought and this ticks both of those boxes.
Of course, it doesn't mean anyone would actually buy a Tesla with bitcoin for anything more than a PR stunt but let's ignore the tiny insignificant details. The only thing that matters right now is what it does for price. I'm a little surprised it wasn't enough to push $50,000 if I'm honest but it's surely only a matter of time. There doesn't appear to be much appetite to sell at this point.