British Pound (GBP) Outlook – Strong UK Sales Data Further Underpins GBP/USD
The latest UK retail sales data beat already lofty expectations this morning as households continue to spend savings accumulated during the lockdown. According to the Office for National Statistics, retail sales grew by 9.2% m/m, twice as much as expected, while year-on-year sales surged by 42.4%, helped by base effects. Clothing sales reported strong growth of 69.4%, while non-food store sales rose by 25.3%.
Ahead today the latest Markit PMI data for May and it will be interesting to see if the ongoing strength in the retail space is reflecting in the services’ reading. For all market-moving economic data and events see the real-time DailyFX calendar.
GBP/USD has spent most of this week trying to make a clean break above 1.4200 but with little success. The pair have been aided by ongoing weakness in the US dollar – the US Dollar Basket (DXY) trades below 90.0 – but 1.4200 continues to thwart traders as they push for a new multi- year high above 1.4242. Sentiment remains bullish with the multi-month uptrend untroubled in recent weeks, while the three simple moving averages remain in a positive pattern. This week’s double-low at 1.4100 should remain supportive in the event of any end-of-week sell-off. Positive PMI data may give cable the nudge it needs to break higher.
GBP/USD DAILY PRICE CHART (JUNE 2020 – MAY 21, 2021)
Crude Oil Prices May Keep Falling as PMI Data Shows Inflation Swell
Crude oil prices put in the worst 3-day run in two months Markets see US-Iran thaw bringing significant supply boost US, UK PMI data in focus for signs of sticky inflation rise
Crude oil prices continued to sink, with the benchmark WTI contract recording its worst three-day performance in two months. Traders are mulling the prospect of a thaw between Washington and Tehran that might see sanctions on Iranian crude exports eased as part of a new denuclearization deal.
Iranian President Hassan Rouhani touted “major” progress in informal negotiations taking place in Vienna, saying that “the main agreement has been made”, with only the “details and finer points” left to be ironed out. Iran has the world’s fourth-largest oil reserves. Its return to market would be a major supply boost.
CRUDE OIL MAY KEEP FALLING AS PMI DATA SHOWS INFLATION SWELL
Looking ahead, the May round-up of UK and US PMI surveys is in focus on the data front. Eurozone figures passed by with little fanfare considering their minimal implications for ultra-dovish ECB policy. The Bank of England and the Fed can be envisioned speeding up stimulus withdrawal however.
The blistering pace of economic growth in both counties over recent months is expected to continue, with the UK accelerating further while the US cools just a bit. Markets might be most interested in the inflation components within these surveys as they try to divine if the upswell in prices is temporary or not.
Investors are combing for evidence suggesting that inflation will be sticky, posing a longer-term policy challenge. For now, the Fed and most other top central banks still argue the rise mainly reflects rebasing of year-on-year calculations beyond the depths of the Covid-driven lows in the first half of 2020.
Frayed supply chains, uneven post-Covid economic reopening (and in some cases even backsliding) and growth rates overclocked by unprecedented fiscal and monetary stimulus may well mean a rethink is in order. If PMI data supports such a hypothesis, sentiment-sensitive crude oil may suffer amid broader risk aversion.
CRUDE OIL TECHNICAL ANALYSIS
Crude oil prices are extending lower as expected after clearing support at 63.53. Sellers now look poised to challenge 60.61. If that too is breached, the pivotal neckline of a would-be Double Top formation comes into play at 57.25. A daily close under it completes the pattern, implying a drop below $47/bbl to follow.
Alternatively, reversing back above 63.53 – now recast as resistance – would put the ceiling in the $66-68/bbl zone into focus. Securing a foothold above this threshold seems like a prerequisite for neutralizing near-term selling pressure and setting the stage for gains.
US Dollar and Yen May Rise as Meme Stocks, Coins Warn of Market Excess
BITCOIN, DOGECOIN, GAMESTOP (GME), US DOLLAR, JAPANESE YEN – TALKING POINTS:
Signs ofspeculative mania in GME, DOGE, Bitcoin may foreshadow market implosion What are the four phenomena seemingly driving the rise in fringe, meme-linked assets? US Dollar, Japanese Yen may rise if market excess puts a premium on anti-risk havens
Signs of market excess began to emerge prior to the 1929 collapse in financial markets that helped trigger the Great Depression. An old industry adage- one that has become an embedded platitude in stories of financial bubbles – states, “When the shoeshine boy gives you stock tips, sell”.
This principle still appliesin the 21st century, though the occupation and medium of communication is different. TikTokers and other social media influencers are the new digital canaries in the financial coal mine. Fringe assets with no clear-cut fundamental value have surgedduring the pandemic in large part thanks to their encouragement.
These assets include – but are certainly not limited to – shares of GameStop, Bitcoin, and its absurdist descendant Dogecoin. Their spectacular rise can arguably be attributed to four phenomena [not in order of relevance]:
1. Gamification of trading
2. Growing interest in trading among millennials
3.“Memeification” of securities
4.Ultra-loose credit conditions
#1 Gamification of Stocks
Trading apps like Robinhood have helped to bring a younger demographic of traders to the financial fore. While this is not problematic in and of itself, newer users are often less experienced. When combined with user-optimized interfaces that make it easier to trade, this has led to the general gamification of stocks and trading (i.e. the adoption of a video gaming-like approach to platforms and services as well as to trading itself).
#2 Growing Interest Among Millennials Engaged in Trading
While retail trading was previously associated with an older and more risk-averse demographic, the new paradigm has come to feel more like a game. The influx of younger traders who grew up in a more digital world with these new trading instruments have begun to change the landscape and nature of trading as a whole.
#3 Memeification of Securities
The rush of younger traders has also brought the social zeitgeist with it. Memes are a key feature of this phenomenon. When memes become associated with or take on the form of an asset – Dogecoin is a prime example – the familiarity that this confers, combined with a trading platform presenting investing in a game-like way, has helped push prices higher.
#4 Ultra-Loose Credit Conditions
When the pandemic hit, central banks all over the world turned up the credit taps full blast in an effort to avoid a credit squeeze and implosion of the global financial system. While the tsunami of liquidity was met with open arms as a bulwark against credit stress, it has also allowed for rampant speculation. At the end of 2020, the tech-leaning Nasdaq was up over 40 percent and the S&P 500 around 15 percent.
However, these returns pale in comparison to some of the outliers, as introduced above. Besides those already mentioned, this also includes shares of Tesla, whose iconic CEO Elon Musk has helped propel the stock to astronomical heights.
Below we will explore four rather strange assets that have attracted acute attention in mainstream media after initially starting off on the social/financial periphery.
DOGECOIN: WHO LET THE DOGE OUT?
Dogecoin was created on December 6, 2013 as a joke using the famous Shiba Inu “Doge” meme as the face of the token. For many years it remained a financial pariah until meme culture began to permeate more mainstream conversations and began to be promoted by celebrities and influencers. It’s growing popularity came with the new wave of younger, meme-friendly traders.
Between January 1 and May 7 of this year, Dogecoin rose by a whopping 13,263.9%. Tesla’s Musk compounded the cryptocurrency’s gains after tweeting “Doge” and “Dogecoin is the people’s crypto”, sending the digital token up over 60% in one day. What started as a joke has led to a market cap of close to $100 billion and wider-spread adoption in retail trade.
Dogecoin – One Year Chart
BITCOIN: ANOTHER ONE BITES THE BUST?
Bitcoin rose by an astounding 117 percent from the beginning of 2021 through mid-April, peaking at over $64,000 per BTC. The rally reflects wider-spread adoption, particularly among those with a strong social media presence like Mr. Musk. It should be noted: he alone is not responsible for Bitcoin’s rally, but he unquestionably played a readily-apparent role.
Bitcoin – Weekly Chart
GAMESTOP: STONKS ONLY GO UP
Gamestop (GME) became famous after what was once described as “the most shorted stock in financial markets” famously turned around and rose over 2,200 percent in less than two weeks. The subreddit thread r/wallstreetbets was the social catalyst, with a redditor named “Roaring Kitty” subsequently testifying before Congress about the stock’s astounding spike.
Gamestop – Monthly Chart
US DOLLAR, JAPANESE YEN MAY RISE IF MEME ASSET FRENZY FIZZLES
The US Dollar and Japanese Yen may be the preferred choice for volatility-shocked investors who at the time may be prioritizing liquidity over returns. Recent bouts of extreme market turbulence – like in 2008 and 2020 – have seen JPY and USD rise against a basket of G10 and EM FX counterparts.
While past performance is not indicative of future results, history sure does seem to rhyme. The Yen and Dollar have a tendency to rally even during shallower bouts of uncertainty and brief spikes of volatility. More of the same is probably in the cards if a collapse in meme assets ripples out into the broader financial markets.
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