Overnight Headlines

*USD bid today after solid week, trading near recent highs

*US equities closed down ending the worst week in over a month

*OPEC+ reaches a deal, supply increases next month, price falls

USD ended last week on a strong note with support from Friday’s retail sales and ongoing concerns about the Delta variant in Asia hurting risk sentiment. Cycle highs at 92.83 are within sight as the euro trades in a tight range around 1.18 ahead of Thursday’s anticipated dovish ECB meeting. “Freedom Day” in the UK is not helping GBP with infection rates rising and cable now resting on support around 1.3750. JPY remains in favour with the USD/JPY and 10-year US Treasury correlation being at its highest in a year.

US equities closed last week lower with the worst performance in a month as investors weighed the spread of the Delta variant against earnings optimism. The S&P500 was down 1% on the week and the Nasdaq off 1.9%. Weakening market internals and stretched price action are other factors contributing to investor angst. Asian markets are lower and futures are in the red to kick off the week.

Market Thoughts – Bumpy summer, “peak” reopening

Summer months always throw up challenging market conditions so the pandemic should really just add to the mix of thin liquidity and unpredictability. Less activity and less risk taking means more volatility. We probably won’t get much clarity on the intentions of the Fed in the coming weeks either which will cause added speculation.

Many market watchers are also pondering if we are now reaching “peak reopening” both in terms of economic data and in earnings. Certainly the bid in bond markets, so fall in yields, points to investor skittishness and traders trying to figure out and prepare for Fed policy normalisation. Chair Powell’s recent cautious tone wasn’t enough to trigger a sustained recovery in risk sentiment while the ECB is expected to be even more prudent this week.

Chart of the Day – OPEC+ reaches an agreement

The major news item of the day from the weekend, was the calling of a snap OPEC+ meeting given last week’s agreement between Saudi Arabia and the United Arab Emirates which patched up the rift blocking the OPEC+ deal. Ministers agreed to increase oil supply from August to cool prices that had climbed to the highest in around two and a half years. This now gives comfort to the market that the group is not splintering in disagreement and also will not be opening up the production floodgates anytime soon.

Prices dropped to $72.14 a few weeks ago and the bid towards $76 has faltered more recently. The 50-day SMA is offering support around $72 along with a long-term trendline. Trading desks are now pointing to higher prices in the months to come as the oil market is still in deficit even with these output increases. Bulls hope to push higher towards the 21-day SMA above $74 with highs at $77.82.