Lack of direction is what investors will be suffering until we see clearer signs of inflation abating. And that will take time, as we must see a couple of encouraging data points to call the central banks’ inflation fight successful.
The lack of clear direction is driving the markets up and down. Yesterday, the weak economic data from China and the US killed joy, but equity bulls still took the upper hand, and maintained the major stock indices above zero. The S&P 500 gapped lower at the open but closed the session 0.40% up despite, or thanks to, a sharp fall in the latest Empire Manufacturing index that printed a scary -31 versus +5 expected by analysts and +11 printed a month earlier.
The weak data again made its magic: revived the expectation that the Federal Reserve (Fed) could not raise the rates at full speed, if the economy starts crumbling. Nasdaq gained 0.62% as big technology names, including Apple (NASDAQ:AAPL), Tesla (NASDAQ:TSLA), and Microsoft (NASDAQ:MSFT) extended their July rally.
Could the stock recovery extend?
July recovery could extend, but we need a series of persistently encouraging economic data to support the stock recovery – and a -31 print on Empire Manufacturing is not what I call encouraging. Yesterday’s data softens the case for the continuation of the steep recovery, and throws the foundation of a period of consolidation, and perhaps a downside correction.
Is crude below $90 sustainable?
Crude oil fell 5% on Monday. The selloff was triggered by weak economic data and encouraging geopolitical news.
Aramco (TADAWUL:2222) said on Sunday that they could raise their output to the maximum capacity of 12 million barrels per day if the Saudi government ordered. And the growing prospect of Iranian oil is playing in favour of the downside, as the latest news revealed that Iran responded to the EU’s proposal for reviving the 2015 nuclear deal between the US and Iran, and European politicians now push the US to adopt a 'realistic approach and flexibility' to resolve a couple of remaining issues. A nuclear deal between the US and Iran should unlock up to 4 million barrels of Iranian oil per day and help ease the supply crisis.
The barrel of American crude trades below the $90 mark, but the downside potential seems limited near the current levels, as the global energy crisis, and tight supply, are the now-hidden factors to which the market rhetoric could rapidly shift.
In the FX
The dollar index rebounded, and the stronger greenback sent the EUR/USD below the 1.02 mark on Monday. The euro bears bring parity back to their target range, thinking that the European Central Bank (ECB) can’t become too aggressive on its rate hikes, when the energy crisis deepens and threatens to send the Eurozone economy into a deep recession.
The dollar-CAD is, on the other hand, swinging between the Canadian dollar bulls’ hope of seeing a recovery in oil prices, and the persistently strong US dollar. Canada will reveal its latest inflation data today. Inflation in Canada is expected to have slowed to 7.6% in July, from 8.1% printed a month earlier. A soft-enough read could soften the Bank of Canada (BoC) hawks, but a single month easing in inflation won’t mean that the BoC would weaken its policy stance when inflation remains near a multi-decade peak.