Written by: Edward Moya | OANDA
The buy-the-dip strategy that has worked so well during the pandemic will soon be tested. Investors initially hit the sell button as growth forecasts for the remainder of the year got slashed as several parts of the world continues to struggle with the fight against COVID-19. A month ago, everyone was thinking the US economy could grow between 8-10%, now that has come down closer to 6%. Growth concerns were dragged down after both news that the Olympics in Tokyo will occur without fans and that the US isn’t any closer to lifting restrictions on international travel.
Treasury yields continue to fall and that might not change unless inflation expectations grow. The 10-year Treasury yield fell below 1.25% in early trade and is settling closer to 1.29%.
Wall Street also has a little bit of nervousness that this earnings season will show peak growth and that is as good as it will get. Elevated stock valuations and a ton of froth in the market have some investors very anxious to head for the sidelines if the banks don’t provide enough reasons to be optimistic about the US consumer. The stock market will see a ton of support from central banks, but the certain pockets of froth might be ripe for a major pullback. Energy stocks and and anything tied to China could be vulnerable over these next couple of weeks.
Earnings season officially kicks off on Tuesday with JPMorgan, Pepsico, Fastenal, and Goldman Sachs reporting before the opening bell.
EUR
The euro is rallying as bond yields slide as concerns grow over the global economic growth outlook for the rest of the year. The ECB strategy review confirmed the adoption of a symmetric 2% target over the medium term. What the ECB didn’t clarify is how much they will allow inflation to overshoot. The new strategy will take effect with the July 22nd ECB monetary policy decision.
The ECB also released a roadmap of climate change-related actions. This will draw some controversy as the central bank will outline key proposals in tackling climate risks.
Oil
Crude prices rebounded after the EIA crude oil inventory report confirmed another significant draw as gasoline demand surged to a record high. The Moya household vacation to Bethany Beach, Delaware happily contributed to the robust demand. Oil bulls did take some caution to the 200,000 bpd rise in US production and lower refinery utilization.
Oil prices have come off too much and that is why weakness didn’t remain the theme despite growing concerns about the spread of the delta COVID Variant. International travel will remain depressed, especially considering some of the surges happening globally. WTI crude seems poised to settle around the low $70s.
Gold
The move higher with gold prices has tentatively been exhausted. Gold prices quickly retreated after rallying above $1,818 as profit-taking triggered a move below the $1,800 level. Most of the headlines on Wall Street support higher gold prices, but a stronger dollar got in the way of today’s rally.
Gold’s short-term outlook is looking rather bullish again now that several parts of the world are grappling with the delta COVID variant and that is downgrading all the global growth forecasts.
Cryptos
Cryptocurrencies across the board are tumbling hard on both concerns that China’s central bank is worried about stablecoins’ risk to financial systems and on broad risk aversion that has risky assets tumbling. Bitcoin appears to be sliding back towards the lower end of the $30,000 to $40,000 trading range. The news that cryptocurrency operator Circle , who has a stablecoin, will go public in a blank-check merger deal valued at $4.5 billion is positive for the cryptoverse but didn’t excite traders.
Bitcoin can’t shake off any negative news from Beijing until the majority of the mining has found a new home, that is hopefully using clean energy. Scrutiny over the progress on using renewable energy is growing and that might take time to prove otherwise.