SP500 shakes off Delta scare to set sights on new highs

This morning release of the minutes from the RBA's July Board meeting, where it announced a tapering of QE, showed an emphasis on flexibility around its decision to taper.

Given the high degree of uncertainty about the economic outlook, members agreed that there should be flexibility to increase or reduce weekly bond purchases in the future, as warranted by the state of the economy at the time.

The inclusion of this guidance combined with the ongoing risks around the spread of the Delta variant into other states of Australia appears likely to see the RBA reverse its July tapering decision at its August meeting.

Instead the RBA is expected to continue QE bond purchases at a pace of A$5bn/week once the current tranche ends in September, before ultimately starting to taper in November 2021.

The likely postponement of tapering has provided another blow to the AUDUSD, already under pressure from a resurgent US dollar, a sharp deterioration in risk sentiment, and lower commodity prices.

Technically, following Monday's break and close below critical support .7420/00 area, the AUDUSD appears at risk of a deeper correction towards .7200c and possibly towards medium term support .7020/.6990 area (coming from several lows in September and November 2020).

Recent lows in the .7400/20 area should provide initial resistance, with a break and consecutive daily closes above the 200-day ma at .7584 needed to indicate the correction is complete, and the uptrend has resumed.

Source Tradingview. The figures stated areas of the 20th of July 2021. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation

UK government advisors estimate the basic reproduction rate of the Delta variant at 7, more contagious than its predecessor, the Alpa variant, with a reproduction rate of 5.

However, vaccines have proved effective, and vaccinated individuals are far less likely to become seriously ill or hospitalised from Delta. As such, widespread lockdowns are unlikely in countries and regions that have a higher vaccination rate.

Specifically, in the key larger economies currently driving the recovery, including the US, China, and Europe, the vaccination rate is closer to 50%. This realisation has prompted a swift recovery in stock markets.

After falling by over 700 points on Monday night, the Dow Jones recovered most of those losses following a 550 point rally overnight. The S&P500 spring boarded 65 points higher, closing at 4323, +1.52% higher.

The correction in US stock indices was not unexpected if only for a reason the rally had become overextended. More so in July as investors committed fresh capital into the market for the start of a new quarter, and from traders buying call options looking to take advantage of the bullish seasonality during the first two weeks of July.

As can be viewed on the chart below, the S&P500 has held and bounced well from uptrend support at 4224, drawn from the pre-US election 3225 low of late October. Providing the S&P500 continues to hold above Monday’s 4224 low, the expectation is a retest and break of the 4384.50 high.

Aware that should the S&P500 break and close below 4224, a deeper pullback towards the June 4126 low is possible, with risks towards the May 4029 low

Source Tradingview. The figures stated areas of the 21st of July 2021. Past performance is not a reliable indicator of future performance. This report does not contain and is not to be taken as containing any financial product advice or financial product recommendation