It seems as if everywhere you look on the economic front, the writing is on the wall: growth expectations have fallen across the markets. Last week’s tumultuous and chaotic price action reveals how investors are trying to negotiate this sobering potentiality. Yet, the market remains relentless in its resilience.
Last week’s market action may have seemed chaotic, especially on an intraday basis. Most days began with dismal declines only to be countered by dramatic reversals. Overall, the US stock indices—that is, the Dow, S&P 500, Nasdaq, and Russell 2000—ended the week in deep crimson.
Taking a step back from the commotion, we can easily piece together the fundamental factors that drove markets to despair:
- Weak factory output and retail sales from China hinted at slowing global growth.
- US consumer sentiment and retail sales hit dramatic lows.
- Delta variant cases worldwide, but especially in the US, are surging.
- Current vaccine rollouts are seemingly inadequate, potentially requiring boosters.
- Bank of America, Goldman Sachs, and research firm Oxford Economics have all cut third-quarter GDP in the US, citing “peak growth and peak inflation.”
- And last but not least, amid signs of slowing growth, the Federal Reserve minutes warn of a possible stimulus tapering as early as this year—a decision that can easily tank the US markets, and along with it, other markets across the globe.
As 10-year US Treasury yields fell to as low as 1.22, the Dollar Index strengthened, breaking above March 2021 resistance at 93.50. The dollar is a traditional haven for investors. Hence the Wall Street adage “cash is king.” But other havens, like gold and bitcoin, showed mixed responses.
Gold saw a series of spinning tops. Not quite the same type of safety-flocking action we saw in the dollar and bonds. The same can’t be said for bitcoin. The new gold (as some “Hodlers” will say)?
A strong dollar weighs on commodities priced in dollars, as it makes certain commodities more expensive across other international currencies. Crude oil was certainly one commodity that felt the brunt of this pressure. More on that later.
Economic News Watch
Economic reports abound for the coming week—nearly all of it potentially market moving. One of the biggest, if not the biggest event will take place on Saturday, August 28: the Jackson Hole symposium. Markets across the globe await the US Federal Reserve opening statement for hawkish or dovish clues that may carve out the course of monetary policy, and in turn, the markets over the remainder of 2021.
Crude Oil Falls Below 65, Now Testing Critical Level of 64
The crude recovery rally got crushed as it broke below the critical support level of 65.00. Dwindling demand and ramped up OPEC+ production likely played a role in crude’s crash. But there’s also China’s weak economic data, dollar strength, and expectations of Fed tapering.
Although the 61.8% had been tested and strongly rejected twice before the final fall last week, note that each successive rally high failed to get close to the July high of 76.98 a barrel. Strong resilience at support may mean very little if weakness toward the top increasingly blunts the hopes of a trend reversal and recovery.