Markets

US equities fell Friday, S&P down 0.8% to be 1% lower over the week. US10y yields fell 1bp to 1.29%, down 7bps on the week.

US inflation expectations tick back up. The 5-10yr Michigan consumer expectations index lifted to 2.9% in July from 2.8% in June, though still below the 3% peak in May. One year ahead, expectations increased more: from 4.2% to 4.8%. Overall, consumer sentiment fell 4.7pts, with falls in both current conditions and expectations, continuing a downward trend since April.

US retail sales beat, but due to downward revisions the prior month, Headline up 0.6%mom, the consensus at -0.3%mom. Retail control, the bit that matters for GDP, is up 1.1% against the consensus at 0.4%mom. But the previous month's retail control revised down 0.7ppts, so mostly a wash.

FOREX

The ECB will incorporate the new Strategy Review into its official post-meeting statement. While we do not think the strategy review points to a significant dovish shift in policy, possible changes to the forward guidance introduce some additional near-term uncertainty around EURUSD. For each reason, I think patience is the right approach for now and stay on the sideline on the Euro.

Coming off a bad week and plumbing the depths of 2021 lows,  to suggest the Aussie is having a rough go of it could be an understatement.  It's getting sold due to Delta Covid concerns that are a weight on all commodity currencies. But we have more bad news to deal with: (1) Sydney's construction industry will be closed until further notice - that sector accounts for 8% of the NSW economy, and 2½% of Australian GDP. (2) residents in selected areas of Sydney will be prevented from going to 'non-essential' workplaces. (3) It seems possible that Victoria's lockdown will be extended. All up, almost half of Australia is under strict lockdown.

All told, the impact on local currency sentiment should be harmful, and I continue to favour Aussie shorts via the USD or NZD. 

GOLD

Gold is trading lower because investors have started to reassess the Fed's stance more hawkishly.

As we enter the Fed blackout period, gold traders will be left "dancing in the dark" this week.

Besides zeroing in on "Real Rates," gold investors have been dancing the beat of FED speak, so with the absence of any FED guidance, gold markets will be left to their own volition and uber-sensitive to any shift in the rates market.

Despite last week's squeeze lower, long positioning remains a bit elevated, suggesting short-term spec traders could use any bounces to reduce positioning length. Typically, ahead of a major risk event such as the FOMC meeting, there is a tendency for markets to backtrack on previous moves as an investment bank and hedge fund traders pare back risk into the event. We look for support to come in at $1800 with the resistance of $1835.

OIL 

On Sunday, OPEC and its Russia-led oil-producing allies agreed to unleash millions of barrels of barreled-up crude over the next two years.

 In the wake of the OPEC production agreement tabled over the weekend, while not unexpected, traders will quickly pivot to the next wild card, which could be the persistent weakness in jet fuel demand even more so as vast Asian travel destinations such as Thailand, Japan, South Korea, Indonesia, and Vietnam tightened mobility restriction again.

Oil prices continued to decline on expectations of more supply following a compromise between leading OPEC producers. However, the compromise limits downside & tail risks to the outlook from either strategy pivot or coalition breakup. And while the Delta variant of Covid is raising its ugly head, it is improbable that a significant developed market will move back into the severe lockdown abyss given robust vaccine rollouts. And should provide support to bid oil on dips, but the pace of the Delta variant does warrant a high degree of caution epically if broader markets morph into a more intense level of risk aversion.