The S&P 500 index reached an all-time high this week, and the bullish momentum continues while above 4,300. Funds still pour into the US stock market.
It was a slow trading week so far, with two main events driving the financial markets price action – the US inflation data for the month of June and the Fed Chair’s semi-annual statement. Also, three central banks delivered their monetary policy – the Bank of Canada, the Reserve Bank of New Zealand, and the Bank of Japan.
Therefore, plenty of reasons existed for the market to experience increased volatility. However, slow summer trading conditions dominated all markets.
The earnings season started strongly, with most corporations beating their estimates this week. The first ones to report were the financial services giants like Wells Fargo, JP Morgan and Citigroup. All three reported better than expected EPS, as most of corporate America is expected to.
A strong earnings season should support equities on every dip. This was the case with the S&P 500 index, which reached a new high in the first three trading days of the week.
Fed Chair Powell’s statement focused on rising inflation and the tapering of asset purchases. The Fed is concerned about much higher inflation than expected, and the US dollar reacted promptly, up against the euro and its peers. However, Powell made it clear that the Fed considers inflation transitory, and only a change in inflation expectations will trigger action on its part.
As for the asset purchases, or quantitative easing, Powell suggested that it is not the time to trim them down yet, but he did highlight that the moment is approaching, preparing market participants for the announcement.
The European indices followed the lead of their US peers – they corrected most of the week but remained close to recent highs. As such, the DAX is sitting comfortably above 15,600 points, the FTSE 100 in the United Kingdom is holding above 7,000. The CAC 40 in France found strong support at the 6,500 level.
The price action in the currency market was much more interesting than in the equity markets. Both the Japanese yen and the US dollar strengthened this week, triggering some interesting price action on the EUR/JPY cross at the 130 level.
Also, the British pound failed to build on the positive jobs report released on the week and remains under pressure against the US dollar. Commodity currencies traded with a weak tone as well.
Gold rewarded investors this week by climbing back above $1,830 an ounce. An inverse head and shoulders pattern gave the technical argument for the move, while higher inflation offered the fundamental reason. Oil fell from its highs, but the outlook remains constructive while above $70.
The price action for the rest of the trading week will be heavily influenced by the CPI release in the Euro area and the US retail sales. The market expects 1.9% inflation in the Euro area and the retail sales to increase by 0.4%.
Markets to Watch
S&P500, EUR/JPY, GBP/USD – markets in focus today.
Every time the S&P 500 index corrects for a day or two, perma-bears argue that it was about time for the decline to come, as the US stocks trade at high valuations. But no correction is worth mentioning as long as the S&P 500 remains in the rising channel seen above. The low interest rate environment makes stocks attractive, and only a move below 4,100 will spoil the bullish momentum.
The EUR/JPY cross ended its bullish run at the 134 level and it has corrected ever since. It finds strong support at the 130 level, unable to post a daily close below. The chances are that the market may need some time to consolidate above the round number in what looks like a possible head and shoulders formation. Moving forward, the bias remains bearish.
An irregular triangle formed on the GBP/USD 4h chart and the price action remains bearish while below 1.39. The better-than-expected jobs data failed to push the pair higher as the US dollar gained ground this week.
Winners and Losers
The US dollar gained moderately this week; oil corrected from its recent highs.