The last week has been great for day traders with the daily ranges expanding and for the trend following traders, the stock markets remain in their uptrends for the last year.
PMI data out today has so far been good, so the economic recovery theme is intact, regardless of the increasing concerns around the coronavirus.
This time last week the stock markets around the globe were looking heavy and we ended up with a big down day to end the week. This followed through the trading sessions on Monday but since Turnaround Tuesday, the markets have been melting up back towards all-time highs.
The week is split between the West and East with Asia-Pacific stock markets not performing as well as Europe and the USA. Japan to be fair has had a couple of bank holidays and is suffering from economic doom brought on by the coronavirus Delta variant.
The USA is in the middle of its earnings season and so far, the companies are reporting better than market analysts’ expectations. Yesterday's data releases were mixed with the US initial jobless claims number coming in a lot worse than expected. Plus, the Democrats and Republicans are at loggerheads over the next stimulus bill. As the markets re-opened for the overnight session, we had learned that Twitter, Snap, and Intel had all blown earnings out of the water, so seeing the Nasdaq rise to the 15,000 level was to be expected. Turns out last Friday/Monday was just another “buy the dip” moment.
The Russell 2000 (RTY) is one of the only major indices not to be joining in the Stonks only go up there, and the rise in Initial Jobless Claims would have affected these smaller companies the most. As does the bottlenecks and supply disruptions.
The Federal Reserve is also conducting large amounts of Reverse Repo Purchases.
Next week’s US commercial banking data will probably show that the technical intervention that the Fed is doing through RRP’s, allows for the removal of Cash assets from the bank’s books, which then allows them to buy other Trading Assets, such as Derivatives, S&P500 futures, Forex. This could be part of why the stock markets are ripping.
Add in some positive rhetoric from a Republican Senator:
Sen Collins on bipartisan infrastructure bill: I'd say three or four issues that need to be resolved. But I'm optimistic that by working through the weekend, we're going to be able to come up with a proposal on Monday that has been our goal.
And the positivity towards risk assets grows.
The forex markets are mixed, with no clear direction in terms of Risk-on/off, with the euro the strongest and the yen the weakest at the London open.
The ActivTrades sentiment indicator shows that 61% of the retail traders are shorting the EURJPY and they have been on the correct side of the trend since the start of July.
There is a chance that the single currency is now going to get bid higher and if so the breakout of this descending trend channel will work if the overall markets are returning to risk-on. This would be represented in the stock markets rising. Obviously, if the ECB were to become more Dovish, the euro could again drop but after yesterday’s ECB meeting, I think the euro is ready to test higher.
If the euro goes higher, I expect the DXY to come out of this rising channel and start to head towards the June FOMC price levels. The ever so near resolution to the Infrastructure Bill for me was the reason we saw a sell-off in the US dollar and with the rising Initial Jobless Claims I think the US government would be keen to add some fiscal support sooner rather than later, and they need to get it done before they all go on holiday!
To add to the bullish euro, we have had good Flash PMI data out of the Eurozone, Germany, and France. Later today we get UK, Canadian, and US PMI data too.
The euro area manufacturing PMI was weaker than last month but across the data that came in this morning, the results were better than expectations.