Stocks and dollar benefit from bullish reversal in markets

The markets have attempted to spin a bullish narrative out of last week’s risk sell off. Stocks led the way with indices in Europe and the US rising more than 1% in some cases. The Vix index, Wall Street’s fear gauge, has also retraced two thirds of the gain from last week. However, safe havens have been slower to react, with gold falling less than $10, it is still $25 higher per ounce than it was this time last week. The Swiss franc failed to give back all of last week’s gains, suggesting that there is some residual fear in FX, bond and commodity markets even if US-North Korean rhetoric has died down.

Why the dollar is ripe for a bounce back

The dollar could be making a permanent comeback. We pointed out last week that USD/ILS (Israeli Shekel) had started to move higher in July. This is significant, as the dollar’s performance against the Shekel tends to be a lead indicator for the dollar index. Also worth noting is that the 30-day RSI has now moved out of oversold territory and is back above 30 at the time of writing. This may suggest a shift in investor sentiment now that the dollar is at a 14-month low on a broad basis.

Euro at risk from central bankers

The dollar was the second best performer in the G10 FX space on Monday after the Swedish Krona, which received a boost ahead of key CPI data due for release later today. The buck was also given a boost from the German Finance Minister who said in an interview that the ECB needed to be cautious about removing ultra-low monetary stimulus. This triggered a sharper sell off in EUR/USD, which dipped below 1.18 by the end of the US session. From a technical perspective EUR/USD looks strong, however it highlights the impact that central bank speak is likely to have on the euro as we lead up to the all-important Jackson Hole conference on 24-26th August.

Real yield plunge leaves sterling vulnerable

EUR/GBP was knocked slightly off course late on Monday, however, we expect that this pair will reach parity in the next 6-months’ or so, which is fast becoming a consensus call. GBP/USD didn’t last long above 1.30 on Monday and it could fall further if CPI rises as expected for last month, inflation data is released later this morning. GBP/USD has risen even though UK real sovereign bond yields have fallen of late, however, if real yields fall further today then we could see sterling start to play catch up. Along with political risks that are mounting in the background, we could see GBP/USD slip back towards 1.25 as we head towards the autumn months.

Tech leads the way, but not all tech stocks created equal

Back to stocks, the Nasdaq 100 has been a good gauge of risk sentiment of late, and it led US indices higher on Monday, suggesting that stock investors are comfortable once more with ever rising stock prices, even with some eye-watering valuations. After Friday’s strong bond sale, the Tesla stock price gapped higher at the open, and was up more than 2% on the day. However, not all tech stocks are created equal, and Snap, which sold off sharply on Friday, failed to regain lost ground. This could go one of two ways for Snap, either it sells off further as the market gets more sceptical of profit-less unicorns with dubious business models, or it’s price becomes so cheap, it made a record post-IPO low on Monday, that it attracts buying interest. Snap investors may be hoping that the latter comes to light.