Financial Markets’ Weekly Recap – July 11-15

The US dollar surged to two-decade highs between Wednesday and Thursday after panic across markets that the Fed might decide a record 100-basis point rate hike next to suppress fresh four-decade highs in consumer prices which constitute a threat later downplayed by the US monetary policymakers.

On Friday, the US Census Bureau reported Retail Sales rose by 1% on a monthly basis to $680.6 billion in June. Although this print surpassed the market forecast of 0.8%, the US dollar continued to lose interest. After hinting at a 100 bps hike just a day ago, Bostic changed his tone on Friday and said moving too dramatically could undermine the positive aspects of the economy and add to the uncertainty. The DXY extended its downward correction with the 100 bps rate hike probability for July declining toward 30%.

Parity Talk

Increasing fears of a recession in the Eurozone have dragged the Euro below parity against the dollar for the first time in almost two decades. Other currencies including sterling and the yen have also slid this year, with aggressive US rate hikes and global recession fears sending investors flocking to the sanctuary of the dollar. The European Central Bank could signal more aggressive tightening to help alleviate and prop up the euro, including a 50-basis-point rate hike in September.

Developments In Oil Markets

In Europe, Nord Stream 1 Gas Pipeline’s annual maintenance started, reviving fears about Russia deliberately delaying the reopening to further reduce supply to Europe.

US President Joe Biden’s Mideast tour brought about no immediate oil output hike. This decision is expected to remain under the umbrella of OPEC+ until at least next September. But strategically, even if the Saudis opt for slightly raising oil output in the coming weeks, after the additional 650,000 bpd a month that OPEC+ has already committed for July and August, it is a kind of a limited win for the White House that hopes to get fuel prices lower.

The overall week in the oil market scored 1 for the bulls and 0 for the bears. Prices fell as much as 7% on the week as earlier losses triggered by the stronger US dollar and optimistic views about Biden’s tour. Crude is increasingly sensitive to the dollar, Fed rate hikes and recession threats showed it was turning into a greater financial arena than a commodity driven just by supply-demand.

Global crude benchmark Brent crude has fallen for five straight weeks now, losing a cumulative 17%. WTI has dropped in four of those five weeks, sliding by a net 19%. New York traded WTI crude at $97.57 per barrel on Friday. London-traded Brent crude posted a final trade of $101.13 per barrel on Friday, after settling the official session up $2.19, or 2.2%, at $101.16 a barrel. For the week, Brent was down 5.5%, while for July it has lost 7.4%.

Bank of Canada’s Rate Decision

Central banks are aggressively moving up lending rates to fight hot inflation, so, on Wednesday, the Bank of Canada raised its benchmark interest rate by y a full percentage point to 2.5 per cent, namely the largest hike the biggest one-time increase in the bank’s rate since 1998, sharply increasing the cost of borrowing in an attempt to rein in runaway inflation.

By Friday, the USD/CAD extended its decline from weekly highs around 1.3220s reached on Thursday, spurred by elevated US PPI data, which showed that inflation is far from peaking, triggering an uptick in expectations of a Fed 100 bps hike, which later eased as Fed policymakers pushed back against those assumptions.

Gold Reacted to Economic Data, Mainly CPI, PPI

Gold was higher by 0.4% in the late New York trade on Wednesday. The precious metal rallied from a low of $1,707.16 to reach a high of $1,745.42 so far on the day. The outlook was mixed following a technical move lower that has corrected sharply in North American trade while the fundamentals open up further downside for precious metals and the Fed will need to remain aggressive at a time when global growth concerns are elevated.

The main topic was the US inflation report on Wednesday. The US June Consumer Price Index climbed 1.3% MoM, leaving the annual rate at 9.1% YoY. This is much stronger than May’s 8.6% print. The consensus was expectations for an 8.8% lift in prices.

Safe-haven flows dominated the financial markets at the start of the week. Renewed concerns over China imposing lockdowns forced investors to seek refuge. Because of the stronger US dollar on Monday, the Gold Index closed in negative territory.

Following Tuesday’s choppy market action, gold price fluctuated on Wednesday. The data published by the US Bureau of Labor Statistics revealed that inflation in the US, as measured by the Consumer Price Index (CPI), jumped to its highest level in four decades at 9.1% on a yearly basis in June from 8.6% in May. This reading surpassed the market expectation of 8.8%. Although XAUUSD fell toward $1,700 with the initial reaction, it managed to stage a rebound in the late American session and ended up posting small daily gains.

Equities

European stocks closed higher on Friday, paring some of this week’s losses after weaker-than-expected data from China fueled fears of a global economic downturn. The pan-European Stoxx 600 index rose 1.8% by the close, with autos jumping 4% to lead gains.

Hong Kong shares for Alibaba Group Holding Ltd. tumbled as much as 5.8% on Friday, after a report that the company faces an inquiry in China in connection with a data theft case renewed regulatory concerns broadly.

Dow Jones jumps 650 points as stocks closed sharply higher after stronger-than expected retail sales report and surge in Wall Street bank shares on Friday. 

U.S. stock indexes closed sharply higher Friday, with the S&P 500 and Dow Jones Industrial Average each snapping a five-day losing streak, after stronger-than-expected retail sales data and a moderation in inflation expectations. A mixed batch of bank earnings also helped propel financial stocks higher, but all three major stock indexes still booked weekly losses.

Next Week

The US economic docket will not be featuring any high-impact data releases at the start of the week. On Monday, market participants might react to the NAHB Housing Market Index data for July, which is expected to edge higher to 68 from 67 in June. Policymakers are paying close attention to housing market conditions and a weak reading could cause the US dollar to weaken and vice versa. On the same note, Housing Starts data on Tuesday will be looked upon for fresh impetus.

On Friday, S&P Global will release the preliminary Manufacturing and Services PMI reports for July. Investors expect the business activity in the private sector to continue to expand at a modest pace. In case either of these PMIs falls below 50 and points to a contraction, USD could stay on the back foot ahead of the weekend.

On Thursday, the European Central Bank (ECB) will announce its policy decisions. The bank is widely expected to raise the key rates by 25 bps and signal a 50 bps hike for September. The ECB remains well behind the tightening curve and the US dollar could capitalize on outflows out of the euro if the bank fails to convince markets that it is prepared to tighten its policy aggressively.

Investors will have only a few mid-tier data releases to factor in when assessing the size of the Fed’s July rate hike. Hence, XAUUSD might find it difficult to make a decisive move in either direction.