US Open Note – Stock indices to claim monthly gains despite jitters; dollar on the backfoot



Stock indices head for a monthly gain

The month of July started with the impression that plans of monetary tightening could get more into fashion, adding a solid footing under currencies, while the earnings season could further brighten the outlook for stocks despite the inflaming virus numbers.

Although the above backdrop has not entirely faded yet, the last week of the month found investors having second thoughts about how soon the Fed would wrap up its bond tapering plans as pandemic-related jitters resurfaced to weigh on growth prospects. Earnings releases enhanced this skepticism, signaling that the impressive performance during the pandemic could be a story of the past, with China’s regulatory crackdown causing another headache to businesses.

Despite the choppy trading, the pan-European STOXX 600 is set for its sixth consecutive monthly gain, somewhat balancing the cautious guidance reported by British and French airlines today. In the US, the S&P 500, Nasdaq 100 and Dow Jones opened slightly lower but are on course to mark the longest winning streak since 2013.

Fed awakes dollar bears; core PCE inflation softer than expected

In the FX space, the US dollar resumed its correlation with Treasury yields and is heading for a negative monthly close against a basket of major currencies thanks to the Fed’s careful approach over tapering actions and the negative implications the delta covid variant could cause.

A softer-than-expected core PCE price index, which clocked in at 3.5% y/y versus the forecast of 3.7%, was offset by an upside surprise in personal income and consumption measures today, letting dollar/yen to climb as high as 109.78. On the other hand, dollar/franc remained stable at 0.9063.

Euro, pound extend bull run

Nevertheless, the recent weakness in the greenback was a blessing for the euro, which otherwise would not have been able to claim any gains as unlike the Fed, the ECB is not planning to abandon its super accommodative policy anytime soon. The muted reaction to July’s upbeat flash CPI inflation and Q2 GDP growth figures out of the Eurozone today mirrored the ECB’s headwinds. The next obstacle for euro/dollar is the 1.1900 level.

Likewise, pound/dollar stretched its bull run above the 50-day simple moving average to peak at a fresh one-month high of 1.3982 ahead of the Bank of England’s policy announcement next Thursday.

Aussie one of the weakest

The Reserve Bank of Australia will meet early on Tuesday, though given the worsening virus conditions in Australia and Asia and the new lockdown restrictions in some regions, the Bank could play down the potential of monetary tightening. Perhaps, this is what is keeping aussie/dollar below the 0.7400 resistance territory, making it one of the worst performing pairs of the day along with other commodity-dependent currencies.

Canadian GDP growth could strengthen in June

Meanwhile in Canada, May’s GDP growth came in line with expectations at -0.3% m/m, while April’s negative revision to -0.5% was shrugged off after Statistics Canada provided a positive flash estimate of 0.7% for June and an annualized expansion of 2.5% in Q2. Dollar/loonie ticked lower to retest intra-day lows following the release.

Commodities

In commodities, gold is still stuck around the $1,830 resistance and the 50-day SMA after Thursday’s quick bounce. WTI oil price, although a bit weaker at $72.53/bpd today, is in the second week of gains, having almost recovered its monthly losses.

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