Caution ahead of Fed Minutes

A day of caution in the markets, with Europe a mixed bag and the US opening marginally lower as we await FOMC minutes later in the session.

Given how much Fed commentary we’ve had over the last couple of weeks, I struggle to see the minutes offering much of value for the markets. Even the most dovish members of the Fed have come around to the idea of tapering this year, with Neel Kashkari even accepting it’s coming either the end of this year or early next.

If that’s the extreme view then a September announcement looks almost nailed on. The only thing that could stand in its way would be a surge in Covid cases and restrictions weighing on activity in the coming months, leading to a sluggish recovery, as Kashkari warned.

But given the strength of the data, barring occasional blips, that’s unlikely to happen in time for the September meeting. The Jackson Hole meeting next week is what everyone is more concerned with now though. There was no reference to monetary policy during Jerome Powell’s online Town Hall event on Tuesday, with the Chairman saving those for next week when all eyes are on him.

UK inflation decline changes nothing

The UK inflation data fell short of expectations on Wednesday, rising only 2% y/y, compared with forecasts of 2.3% and down from 2.5%. Despite what the headline number suggests, this is not a sign of price pressures in the UK normalising, rather a temporary blip that will reverse course in the coming months.

The primary cause of the drop was base effects, with July last year seeing a spike in inflation as the economy reopened. Inflationary pressures are expected to build in the months ahead which the MPC will likely overlook due to the transitory nature of them.

There hasn’t been much of a response to the data this morning, despite the significant miss; a sign that traders don’t view this as a substantial or sustainable shift that will have any influence on interest rates.

Oil gives up earlier gains, EIA reports higher draw

Oil prices are flat on the day after giving up earlier gains and continue to trade not far from their summer lows. Even a larger than expected draw in inventories, reported by EIA, has done little to lift prices. Brent ran into resistance earlier in the day around $70 and has been on a downward spiral since.

Crude prices continue to look vulnerable around those mid to late summer support levels – $65 in WTI and $67 in Brent. Slower growth in China as it imposes further restrictions in response to rising Covid cases and some weakness in a few US data points this past week has driven the softness in oil prices.

Whether that’s enough to drive it below such a key support level is another thing. A move below $65 in WTI, for example, could see prices drop back into Q2 trading ranges between $57 and $65. This would be quite a drop from the levels we’ve seen the last couple of months and surely reflect growing concerns about the spread of delta and the implications for fourth quarter growth.

Gold sees profit taking after resurgence

Gold prices are pulling back from this weeks highs after falling just short of $1,800. This is a big psychological barrier for the yellow metal, not to mention a key support level for most of July and the 50% retracement level for the June highs to August lows. It’s no wonder we’ve seen profit taking kicking in.

The question is whether that’s all we’re seeing or can we expect more from the yellow metal, having looked down and out only a week or so ago. Further significant resistance lies just above here, with the 200-day SMA falling not far from the July highs, a break of which would be very bullish, indeed.

Bitcoin could see larger correction

Bitcoin is making small gains today after finding some support around $44,000. This is roughtly a 38.2% retracement of the August lows and highs and falls around the mid-August lows which could make it a key area of support once more. A move below here could signal a sharper correction, with $42,500 and $41,000 key below.

The medium-term outlook still looks promising for bitcoin but the near-term could see profit taking continue and major prior resistance levels re-tested from above.