Ho Hum - Another Day, Another Record High For US Stocks

Markets

Another day, another equity record. S&P up another 0.2% Friday to set another fresh record high and up 0.7% for the week. But after grinding higher all week, US10Yr yields returned all of their gains, closing 8bps lower on the day at 1.28% and down 2bps compared to the Friday prior.

A bond rally followed a plunge in US consumer sentiment, with the University of Michigan index down 11pts to its lowest level since 2011. Both current conditions and expectations fell. According to Michigan, Delta played a significant role: "the extraordinary surge in negative economic assessments … reflects an emotional response, mainly from dashed hopes that the pandemic would soon end".

Meanwhile, Michigan also reported that 5-10yr consumer inflation expectations rose, up 0.2ppts to 3.0%, back to the equal high since 2013.

Forex

Even before the weak University of Michigan consumer numbers, the fixed income market was rallying, and a short squeeze on the EURUSD was unfolding, so an acceleration of the moves after the disappointing data should be no surprise. It looks like investors are adjusting for a less aggressive FOMC tapering shift instead of an outright risk-off action with fixed income well bid, FX traders selling the US dollar, but equities, on the whole, remain well supported.

Nasdaq outperforms the more cyclical names in the Dow Jones and S&P, pointing to a softer FOMC policy move, not a worrying move. Volumes remain weak, however, as the "dog days of summer" weigh on market volumes.

Still, plunging confidence has given misleading signals in the past; incomes are growing, jobs are being added in significant numbers, equities are at all-time highs, so fundamentals, in general, are healthy and point to robust spending, so I'm not so sure the Euro will become the apple of the market eye.

Rates markets could see more volatility this week with the FOMC minutes release, Retail Sales print, Initial Jobless Claims and RBNZ meeting.

Gold Markets

Gold turned positive last week after it accelerated above $1775 on the back of retail flows. Prices were up by 1.5% on Friday, boosted by lower US yields and the US dollar on the back of a sharp decline in the U. of Michigan consumer sentiment index. After a massive reversal from the Monday flash crash, the yellow metal erased its weekly losses to be in positive territory. Increased physical demand provided further support to bullion, particularly from India and China, where premiums rebounded. 

We've been trying to find a silver lining for oil markets, but with the Delta variant still making top billing headlines, it's like looking for a needle in a haystack.

Oil Markets

Brent's price reversed again on Friday, and $70 bbl gave way in early Asia this morning. Although well acknowledged as far as its presence and demand effect, the various resurgences in Covid cases and lockdown impacts have been acting as a hand brake on the demand recovery, even more significantly when they impact large consuming countries such as China, India, or Indonesia.

Unfortunately for many of us trying to find the elusive trend, Covid-19 is likely to continue to have an impact through the autumn and winter of 2021/22, with prices possibly holding around these levels and short-term volatility looking to be the most likely scenario.