Risk recovers after major swoon
The recent sharp selloff in markets does now appear to be one of those summer moves that every analyst forgets about at this time of the year. We have consistently said summer markets frequently see head-scratching price action due to thin liquidity and less activity. It is the nature of the season! Traders and investors at major banks and funds take time off and have very little risk on their books while they are away.
The broadening bounce we have seen recently does point to Monday’s selloff being a one-off event driven essentially by stop-loss driven trading and liquidity issues. The comeback in safe haven yields and crude oil are the most obvious signs pointing in this direction.
Stocks regain losses
US stocks bounced for a second day and the S&P 500 has now more or less erased the past week’s decline.
A slew of strong earnings helped push back on virus concerns, with the current earnings season seeing 85% of S&P 500 companies reporting so far beating analyst expectations.
Meanwhile, the dollar sold off yesterday after making fresh four-month highs at 93.19. The broad recovery in risk assets dented the appeal of the greenback though the world’s reserve currency hasn’t yet fully rolled over as one might expect in a full-on risk-on environment.
ECB on the radar
The ECB’s new policy framework may make the Governing Council more committed to a dovish stance, at least in the near term. We should expect some acknowledgement of the improving economic data and the positive contribution to the vaccine rollout. But the now dominant Delta variant may contribute further to the uneven and fragile recovery.
With the hawks and doves still battling behind the scenes, EUR/USD may see some volatility after the single currency enjoyed its safe haven status over the last few days. The pair is gearing up for a “death cross” of its 50-day and 200-day moving average just above 1.20. This points to more downside so watch support at 1.17519 and then the cycle low at 1.17042. A close above 1.1850 is needed to neutralise the downside threat.