Weekly Market Wrap 19-Jul to 23-Jul 2021

Marius Paun | London, UK | Senior dealer |Friday 23rd July 2021

The ECB keeps interest rates on hold

The US stock markets saw sharp selloffs on Monday following a resurgence in Covid-19 infections around the world, especially the dreaded Delta variant. But things started to look calmer over the next few days and the main indices recovered all of the losses. By and large, the earnings season surprised on the positive side so far, reigniting the risk-on mood. The US president Joe Biden weighed in saying ‘most experts’ believe long term inflation is not likely to get out of hands’….. plenty of hedge funds old-timers would strongly disagree.

On another note, the US Senate voted 51-49 against starting the debate on the bipartisan infrastructure bill. That was not very encouraging and undoubtedly angered the White House, but at least a few hours after the vote, the media reported the hype has started again. It could be a signal there is still significant interest in passing the bill, although possibly in a different format.

We also learnt that The People’s Bank of China held a 1-year interest rate at 3.85% and 5-year at 4.65% for the 15th month in a row in a move that was widely expected. Earlier in the month, the central bank lowered the cash that banks need to hold as reserves thus freeing up around 1 trillion yuan in long-term liquidity.

The European Central Bank left its benchmark interest rate unchanged during its July monetary policy meeting, adding that the QE will continue at its current pace. President Christine Lagarde said the medium-term outlook for inflation remains well below ECB’s target. As a result, the ECB has revised the forward guidance on interest rates emphasizing its commitment to maintaining an easy monetary policy. Specifically, rates will stay at their present levels or lower until inflation reaches 2%. The ECB admitted that a transitory period in which ‘inflation is moderately above target’ is also possible.

Back in the UK, the Bank of England policymaker Ben Broadbent said the extent of rising in inflation has indeed been surprising and needs close attention going forward. However, for now, he was not convinced that the current spike in retail goods prices would necessarily translate to higher inflation 18-24 months down the line.

The US oil prices followed stocks lower on Monday’s session but recouped the losses to trade around $71.3 on Friday afternoon. Over the last weekend, OPEC+ agreed to a plan to increase output in 400,000 BPD. During the previous meeting, tension was high as the UAE demanded a higher baseline quota starting in May. That left OPEC in a bit of an impasse until Saudi Arabia, as always, made a compromise with the UAE.

Gold prices dropped to $1789 this week where it found good support largely on an ongoing strength in the US dollar. The precious metal oscillated around $1800 mark looking for direction although many say the prospect of inflation should act as solid support.

Bitcoin came under pressure at the beginning of the week dropping below the $30,000 mark on the risk-off mood in the world markets. Nevertheless, sentiment turned mid-week which pushed it back above 32,000 when Musk said Tesla will ‘most likely’ resume accepting bitcoin….. make up your mind Elon!