Welcome to our look back at the previous month and a look ahead to what we might expect to see throughout August and beyond.
We started the first day of July with OPEC+ looking at increasing production which sent Crude prices higher and other assets followed. This was short-lived, however, with news of the COVID Delta Variant affecting demand...again.
In a bizarre move, the Chinese government has made it illegal for private education companies to make a profit, raise capital which hit global stock markets.
The US Congress has approved a massive Infrastructure bill which could not have come at a better time to boost employment, hopefully, and increase productivity in the US.
The major news items to watch going forward into August will include the status of the Delta Variant of COVID, which may have already ruined the summer 2021 travel season, and China who are clearly looking at rewriting the rules on trade, business, and capitalism, within their own borders and beyond.
As we can see from our charts, price action on WTI Spot and Brent Crude Spot pretty much finished the month where it started, but with a wild ride in between. We started the month with news of OPEC+ production increases, and data from Cushing, Oklahoma showing very low inventories, which pushed prices higher. However, pessimism regarding the COVID Delta Variant had prices falling dramatically 3 times during the month with recoveries each time.
The spot price on WTI finished the month at $73.86 per barrel with the corresponding Brent Crude price at $76.00.
If we note the Valutrades Futures Contracts for September and October, we see current prices which are lower than the Cash or Spot price, which is called “Backwardation” and is often a positive sign for a market as it encourages suppliers to draw down inventories.
Most of the price action we would expect on the Greenback had already taken place in June with the Fed looking at bringing Interest Rate rises forward and tapering bond purchases. However, the main difference in the language this month is that the inflation that we have been seeing, may no longer be considered “transitory”. If this is true, expect a weaker USD into August and beyond.
Combining higher inflation with massive borrowing and spending on the Infrastructure Bill, will see USD fall even further but we will have to wait and see when the spending actually starts.
The economic calendar in July had mixed results for the US economy with bad GDP and Employment data (except for the first 2 days of the month) but better data in the area of Retail Sales, PMIs, etc.
As we can see from our charts, EUR results were mixed in July with strength against AUD but falling against CHF and JPY.
July’s ECB statement on the 22nd of the month made it quite clear that they have no intention of raising Interest Rates anytime soon and they avoided talking about tapering, contrary to other major Central Banks. This was seen, not as being uncommunicative, but as an attempt to maintain calm in the markets.
Going into August and September, we may see some EUR pain as the prospects for a good summer tourist season look bleak even though some countries are trying to relax travel restrictions.
A technical opportunity has shown itself in this massive Double Top on EURUSD on the Weekly chart. If we break the neckline, we have a long way to fall with several key levels below. However, this pattern could be forming a Symmetrical Pennant but we will need to keep an eye on it over the next few weeks.
As we can see from our charts on the China A50 Index and the Hang Seng, our little yellow box show the falls in the equities markets after the Chinese government made it illegal for private education companies to make a profit, raise capital, and go public, which hit global stock markets. The national curriculum is to be changed to make education more “national” and private tutoring is to be banned on weekends and holidays. This fall in the Chinese and Hong Kong equity markets rippled through the other global equity markets but we have since recovered.
The main fear is that the crackdown on Education Companies is just the start and that other sectors will be targeted and other industries may be nationalised.
Also, many countries, like the US, the UK, and Canada, are opening their borders and offering Hong Kong citizens the chance to relocate. This, and myriad other signs, make the HK50 a bad bet going into August and the rest of the year. You may hear us saying “Buy the Dip” with Stock Indices; well, in the case of the HK50, it may be better to “Sell the Bump”.
July saw a “wild ride” for US Equities but the Dow Jones Industrial Average, the NASDAQ, and the S&P 500 all hit record highs near the end of the month and we see no reason why they shouldn’t keep moving upward through August and into the rest of the year.
The US Congress has approved a massive Infrastructure bill which could not have come at a better time to boost employment, hopefully, and increase productivity in the US. The growing wealth gap between the rich and the not-so-rich is keeping Jerome Powell awake at night and the Fed is slowly starting to admit that the current bout of inflation may not be so “transitory” as they had previously thought.
These inflation fears saw a mini-crash in the stock markets mid-month but thanks to the resilience of investors, who saw the opportunity to “Buy the Dip”, markets recovered quickly.
For geographic and cultural reasons, the Antipodean economies are linked but we can clearly see that during July, NZD was leading over AUD.
Both economies have been hit by COVID and problems with China but, as we reported last month, Australia has been suffering more from trade issues with China and is constantly looking for more trading partners globally.
Many traders found some easy opportunities to short AUD and NZD pairs when the Chinese equity markets fell last week. If you have followed our Market Blast videos every Monday and Tuesday, you would have seen these.
Another main difference between the two economies, sadly, is that Australia has not handled the latest COVID Delta Variant as well as the Kiwis have and New Zealand has just imposed travel restrictions against their favourite neighbours.
Overall, Pound Sterling gained against other currencies except for JPY and CHF, which tells us more about safe-haven currencies like the Yen and the Swiss franc.
Despite a bumpy start, the UK economy is reopening with newly found optimism. Even though COVID Delta cases jumped in the third week of the month, there was an equally interesting fall at the end of the month which showed us something very important: the vaccine is doing its job with the UK having a relatively high rate of vaccinated citizens. The death and hospitalisation rate is nowhere near where it was last autumn which can only be a positive signal for the economy and the Pound. The attitude of the general public regarding vaccines and passporting, contrary to countries like the US and France, has proved positive for the UK economy as well.
As added bonuses, the Chancellor of the Exchequer has pledged to restore the City of London to its former glory as an international centre of finance and the UK seems to be doing quite well, negotiating trade agreements, now that it is not under the thumb of the European Union.
During the month of July XAUUSD ranged between $1795 and $1832. Nicely, the $1832 level of resistance is also the 38.2% Fibonacci retracement level from the bear run of August 2020 to the Double Bottom of March 2021.
Gold was more affected by the fluctuating US bond markets and the value of its counterpart USD during July so let’s see if, from the technical side, price action falls again to the $1795 level of support.
That’s all for now. Make sure you subscribe to the Valutrades blogs and videos and we will see you here at the end of August.
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