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Week Ahead: Will Risk-on Continue if there is Stronger Data this Week?

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Fundamental analysis of Forex market

Last week was quiet as far as news was concerned, and the markets were left to themselves to act without an obvious catalyst.  While the chatter was on higher US inflation and stronger bank earnings, markets seemed to brush them aside and buy “risky” assets.  Is a November taper announcement priced in? One of those risky assets was Bitcoin, which is approaching all-time highs.  This week, the theme is set to continue, with Inflation data due out from New Zealand, UK, Canada, and Japan, as well as global Flash PMIs.  There will also be a data dump on Monday from China. Earnings season continues as the first of the FAANGs reports, NFLX, as well as other big names such as JNJ, TSLA, T, BX, INTC, and SNAP.  Traders will be watching for revisions to forward guidance.

US CPI for September (YoY) was 5.4% vs an August print of 5.3%. This equals the highest level in 13 years.  US PPI for September (YoY) was 8.6% vs 8.3% in August, its highest level since the Great Financial Crisis.   It’s not too often we write about the weekly initial jobless claims data.  However, for the week ending October 2nd, Initial Jobless Claims fell below 300,000 for the first time since the pandemic began in the US in March 2020.  The print was 293,000.  US Retail Sales were 0.7% vs an expectation of -0.2% and a revision higher of August’s print to 0.9%. This data lines up for the Fed to announce a taper at its November 3rd meeting.  Many people even talking about the dreaded S-word, “Stagflation”. By the way, the Fed minutes were also released last week. And in addition to Powell saying that tapering could be done by mid-2022, the minutes showed that there was discussion of tapering $15 billion a month beginning in mid-November of mid-December.  Also, bank earnings were stellar, with MS, C, BAC, and GS all beating estimates due to investment banking deals and a release of cash that was on reserves for bad loans during Covid.

With the stronger US data last week, traders may have expected risk to sell off as tapering may very well be in the near future.  However, funds were put to work as the DJIA was up over 1.5%, S&P 500 was up over 1.75%, the NASDAQ was up nearly 2% and the Russell 2000 was up nearly 2.4%.  In addition, Bitcoin, considered a risky asset and definitely considered a volatile asset, was up over 12.5% last week and up over 43% the last 3 weeks!  Meanwhile, commodity currencies were moving right in stride with Bitcoin last week, as such currencies as the Austrian Dollar, Canadian Dollar, and Russian Ruble were also higher. Will the move into risk continue this week?

Earnings reports will be front and center this week.  Will earnings be better than expected, as with US banks last week?  Will forward guidance be adjusted? Traders will be monitoring the answers to these questions closely.  Some of the more popular traded names releasing earnings this week are as follows:  UAL, BK, HAL, PG, PM, NFLX, JNJ, BIIB, VZ, TSLA, ABT, T, BX, INTC, SNAP, SAP, AXP, HON

In addition, the economic calendar releases move away from the US this week. Inflation data will be released from New Zealand, Germany, Eurozone, Canada, and Japan.  Will higher inflation continue to push funds into risky assets, or will traders fear central bank tapering and cut back on risk?  In addition, China releases Q3 GDP, Industrial Production, Retail Sales and the Unemployment Rate for September.  Traders will watch to see if evidence of a China slowdown continues. Other notable economic data releases are as follows:

Monday

  • New Zealand: CPI (Q3)
  • China: GDP Growth Rate (Q3)
  • China: Industrial Production (SEP)
  • China: Retail Sales (SEP)
  • China: Unemployment Rate (SEP)
  • Canada: Housing Starts (SEP)
  • US: Industrial Production (SEP)
  • US: Manufacturing Production (SEP)
  • US: NAHB Housing Market Index (OCT)
  • Canada: Business Outlook Survey Indicator (Q3)

Tuesday

  • Australia: RBA Meeting Minutes
  • US: Housing Starts (SEP)
  • US: Building Permits(SEP)

Wednesday

  • Japan: Trade Balance (SEP)
  • China: House Price Index (SEP)
  • Germany: PPI (SEP)
  • UK: Inflation Data (SEP)
  • Eurozone: Inflation Rate Final (SEP)
  • Canada: Inflation Rate (SEP)
  • US:Crude Inventories

Thursday

  • UK: CBI Business Optimism Index (Q4)
  • UK: CBI Industrial Trends Orders (OCT)
  • Canada: New Housing Price Index (SEP)
  • US: Philly Fed Manufacturing Index (OCT)
  • EU: Consumer Confidence Flash (OCT)
  • US: Existing Home Sales (SEP)

Friday

  • Global: Manufacturing and Services PMI Flashes (OCT)
  • Japan: Inflation Rate (SEP)
  • UK: Retail Sales (SEP)
  • Canada: Retail Sales (AUG)
  • Canada: Manufacturing Sales Prel (SEP)

Chart of the Week: Weekly Copper

Source: Tradingview, Stone X

With the risk-on mode last week, commodities are bid as well.  As a result, copper has had one of its best week’s ever!  The industrial metal closed up last week nearly 10.5%, breaking out of a correction channel and testing the highs from the week of May 10th near 4.8857.  If the risk-on theme continues into next week (China data may play a part), copper may continue higher.  First resistance on the weekly timeframe is at 4.8857, then the 127.2% and 161.8% Fibonacci extensions from the highs of the week of May 10th to the lows of the week of August 16th at 5.1579 and 5.4587, respectively.  Support is at an upward sloping trendline that dates back to March 2020, then the downward sloping trendline of the correction channel near 4.4688.  After that is the 50-Week Moving Average at 4.0756 and the August 16th weekly lows at 3.9585.

With more inflation data out this week from around the global, it will be interesting to see if traders continue with the risk-on theme if the data is higher than expected.  However, if earnings reports are weaker or if forecasts are revised lower, there may be some volatility.  Flows may then shift to a risk-off mode!

Have a great weekend!