US Open Note – Pandemic anxiety spurs risk aversion; Wall street futures in the red



Pandemic uncertainty resurfaces

The cocktail of a contagious Covid delta variant and the stabilization in vaccinations revived memories of lockdown restrictions and amplified inflation fears at a time when investors were confident that the summer months could boost economic growth, especially in the hardest-hit tourism sector.

The major concern is how the pandemic will evolve when the flu activity resurfaces in the last quarter of the year and whether governments will reimpose strict curbs or let herd immunity do its job alone as governments and central banks have already exhausted their stimulus packages.

Global stocks hit by risk aversion

With investors pulling funds out of riskier assets, stock markets took big hits worldwide, marking one of the longest negative strikes in months. Particularly, the pan-European STOXX 600 slumped by 1.78% to the lowest in almost two months as the travel industry dipped in the red zone, while other sectors were also in pain.

Wall Street is set to join the sell-off, with futures pointing to a brutal opening, but hopes are for the big tech companies to come to the rescue when they publish their earnings results in the coming weeks. From a technical perspective, it would be interesting to see if the decline can extend below the support of the 20-day SMA in the S&P 500, Dow Jones and Nasdaq 100.

Bonds, safe-haven currencies soar

In safe havens, demand for global government bonds thrived, extending the downtrend in the 10-year Treasury yield to a five-month low of 1.2470%.

The yen and Swiss franc pairs tend to log significant gains when risk-off sentiment accelerates, though the battle against the US dollar gets more challenging when confidence for the US economy remains relatively lukewarm. Currently, there are no serious concerns around the slight pickup in US virus cases. Hence, the greenback managed to steal some ground from its European and Asian counterparts despite some softness in recent US data. However, whether the ongoing inflation debate can force the Fed to bring forward its tapering and rate hike plans and deviate from other cautious central banks, unleashing another rally in the dollar, that remains to be seen.

For now, dollar/yen is trading marginally lower, testing the 109.00 level, whereas dollar/swiss franc is slightly higher in the day, looking for a close above the 0.9200 number. Perhaps, the spike in dollar/loonie, which got extra fuel from OPEC’s supply increase announcement and the 3.0% freefall in oil prices, is more fascinating to monitor as the pair is fighting for the 1.2800 number.

Loonie/yen is the worst performer today, losing 1.65% on the day. The antipodeans are the next victims.

Pound cannot enjoy "Freedom Day"

Meanwhile in the UK, although it is "Freedom Day", with most of the restrictions being removed, the situation is a double trouble for the pound as infections show no sign of abating. The low death rate is a relief for now, but still the months ahead are uncertain, especially as inflation concerns are causing some anxiety to BoE policymaker Haskel today, who attempted to play down the scenario of a tighter policy in contrast to Saunders last week.

Pound/dollar seems to be at a critical region, flirting with the 200-day SMA on the downside and the March low of 1.3668.

Euro waits for ECB policy announcement

On the other hand, euro/dollar is still some distance above its March low of 1.1703 despite today’s downfall, though some caution is warranted ahead of the ECB policy announcement on Thursday. A potential bounce in the German producer prices may attract some attention on Tuesday at 06:00 GMT.

Metals

In precious metals, the resilience in the dollar caused some damage to gold, pressing the precious metal slightly below the $1,800 level. Silver and copper were in a worst position.

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