Aggressive policy buoys markets

Abraham George Macro Views

The spike in the ‘delta variant’ is the perfect cover for the Fed and for the government to maintain their aggressive policy stance. Even with the very hot inflation reports last week and the ever booming earnings report the senate Democrats announced a $3.5 trio stimulus plan. Not to be outdone president Biden called on Congress for another $1 trio for infrastructure spending.

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All along Fed Chairman Jerome Powell has been beating his drums loud that the ‘inflation is transitory’. The medias are driving the “ soaring case” narrative. There is no question the variant cases are rising but it is from a very low base. Day before yesterday, stocks traded sharply lower but closed back above the very important lockdown induced trend line from the lows of last year when the Fed announced that it would start buying corporate bonds.

It is very unlikely the markets will crash now with the aggressive policy stance that the Fed has maintained. Therefore any reasonable weakness is a buying opportunity in the current environment.

Actually by midday yesterday stocks had fully recovered the slide of the day before. What it proves again is that the environment for stocks and the economy will continue to point upwards despite any hiccups.

From the close of last week the biggest fall was in oil. The news on Sunday was that there is big standoff between the Saudis and UAE but now it looks like that is sorted out. I think oil has provided a great buying opportunity.

Equities

Everything was pointing towards further falls in the markets. All sentiment indicators argued markets could break further down but yesterday’s quick rebound questions those analysis. The rest of the week’s price action and this week’s closing should determine the major direction of the markets.

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Bonds

The countertrend rally in bonds continue to stay on course. There is a chance it can rally to 168 and that should be a very significant resistance. The next move down in bonds could be significant.

Euro

Euro could have made a low at 1.1763 yesterday. The implication is that there is an impending rally that can take prices to 1.1950 to 1.1975 .

Gold

Gold prices rallied to 1834 on Jul 15 and has started to show weakness. Prices have to break below 1791 to confirm that there is more weakness. A close below 1790 should give more confidence that new lows could be in the offing.

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Abraham George is a seasoned investment manager with more than 40 years of experience in trading & investment and portfolio management spanning diverse environments like banks (HSBC, ADCB), sovereign wealth fund (ADIA), a royal family office and a hedge fund.