Week In Review: Oil Surges, Reflation Trade, Dollar Slips

Equity bulls were on a tear, pushing Asian and European markets to unchartered territories following a new record close for US indices last Friday.

In our technical outlook, we covered oil which climbed back to pre-pandemic levels having hit an all-time low last year. The healthy combination of stimulus hopes, optimism around global growth, and production cuts from OPEC+ have created an accommodating environment for oil bulls. On top of this, the number of tankers sailing to China has hit the highest level in 6 months, signalling robust demand. Brent Crude is trading around $61.50 while WTI just below $58.50 as of writing.

Risk-on pretty much remained in the name of the game on Tuesday thanks to progress over a proposed $1.9 trillion US fiscal package. As the reflation trade pushed equity markets higher, it weakened the dollar – ultimately dragging the DXY back below 91.00. As markets paused for breath later in the week, our focus was directed towards earnings reports from Twitter & Disney which both beat estimates.

Elon Musk was back in the spotlight after Tesla bought $1.5 billion worth of Bitcoin. The cryptocurrency sharply appreciated towards $49,000 raising expectations over bulls claiming $50,000 in the short term. Bitcoin has appreciated over 60% since the start of 2021.

We critically covered oil prices ahead of IEA and OPEC reports on Thursday. Although the economic indicators were not showing evidence of inflation yet, oil bulls remain in the driving seat. This uptrend comes against a backdrop of lockdown extensions that may threaten demand. Given how many producers are expected to enter the markets now prices are back above $60 this may cap upside gains in the medium to longer term.

Fed Chairman Jerome Powell was in focus after dampening down inflation expectations. There is no doubt that riskier assets are drawing strength from stimulus hopes and cheap money from central banks. This has sparked concerns around rapidly rising inflation, something that could hurt equity returns and force central banks to start tightening. Given how the Fed’s monetary punchbowl remains full, fears around rising inflation is poised to remain a key theme.

In regards to gold, the metal seems undecided and unable to breakout of the current range. A fresh directional catalyst may be needed for gold to break away from the sticky $1850 regions. Looking at the technicals, a breakdown below $1820 could open the doors towards $1800.

The week ahead promises to be eventful thanks to key economic data from major economies and earnings. The tired dollar could be offered a chance to redeem itself depending on how markets react to the FOMC meeting minutes, U.S retail sales & Markit PMI’s. While US markets will be closed on Monday due to the Presidents Day holiday, there could be some action across currency markets ahead of the Euro-area industrial production data and Japan GDP.

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