Week In Review: Market Caution, China Crackdown, Dovish Fed

On Tuesday, market sentiment remained shaky as investors kept a close eye on China following the multiple crackdowns. It was a big day for big tech as Apple, Microsoft and Alphabet released their quarterly earnings. Earnings and revenues from the tech titans crushed market expectations.

In the currency space, we set our sights on the dollar ahead of the Federal Reserve policy meeting. There were other key data points such as second-quarter GDP and core PCE inflation that were likely to influence the currency’s performance.

Our trade of the week for the Social media index which tracks the overall performance of social media companies via Twitter, Facebook, Snap, and Alphabet all in equal weights.

It was all about the Federal Reserve policy meeting on Wednesday. As widely expected, the central bank left monetary policy unchanged and maintained a dovish stance. Anyone who was expecting a hawkish surprise was left empty-handed after Chair Powell stated that rate increases were “a ways away”. A cautious Fed dealt a heavy blow to the dollar while injecting equity bulls with a renewed sense of confidence.

In fact, stocks across the continent were painted green on Thursday thanks to the Fed’s dovish message overnight. The US Senate voting to move ahead on the $1.2 trillion infrastructure plan and robust earnings in Europe also supported the risk-on mood.

One of the major talking points near the end of the week for the US GDP report for Q2. The largest economy in the world grew at a 6.5% annualised rate in the second quarter of 2021. Although this was below the 8.5% expectations, it was still the biggest increase in growth seen since the third quarter of 2020.

Caution was the name of the game on Friday as China’s regulatory crackdown continued to spook investors. U.S stocks fell, registering losses for the week after e-commerce giant Amazon late Thursday reported disappointing quarterly results. Nevertheless, the S&P 500 has ended July with another month of gains.

In other news, the core PCE which is the Fed’s favoured measure of inflation edged higher to 3.5% in June from 3.4% in May – its biggest increase since July 1991.

Looking at commodities, gold found itself under pressure at the end of the week thanks to a strengthening dollar. However, the precious metal was able to end July with a monthly gain. Renewed signs that the Federal Reserve may not taper anytime soon may sweeten appetite for the precious metal in the new month. With prices back below the 200-day Simple Moving Average, bears could steal return to the scene.

By Lukman Otunuga, FXTM Senior Research Analyst

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