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Wall of Worry Builds as Financial Markets Focus on Delta Variant - Market Minutes

Wall of Worry Builds as Financial Markets Focus on Delta Variant - Market Minutes

Christopher Vecchio, CFA, Senior Strategist
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Market Minutes Overview:

  • Volatility is down, US stocks are up, and the US Dollar (via the DXY Index) keeps climbing.
  • Data from the UK suggests that the most recent wave of COVID-19 infections is not producing the same levels of deaths as the prior wave – thanks to the vaccines.
  • A quiet economic calendar for most of the week means that financial markets will continue to focus on the delta variant.

Unringing the Bell

“The toothpaste is out of the tube,” said an unnamed commentator on a major US financial media network yesterday when discussing the delta variant. I disagree, and apparently so too do US financial markets. Measures of volatility are down, the US Treasury yield curve is steepening, US equity markets are rallying sharply, and the US Dollar (via the DXY Index) continues to climb. Capital is pouring into the United States amid concerns that the delta variant will provoke a new wave of lockdowns.

But soberminded market participants are looking past the noisy headlines, apparently. The bell is being un=-rung, if you will; the toothpaste is going back in the tube. The data out of the UK suggests that the most recent wave of COVID-19 infections is not producing the same levels of deaths as the prior wave – thanks to the vaccines. And considering that the vaccine administered in the UK (AstraZeneca) has proved lower efficacy in fighting the virus than the mRNA vaccines distributed in the US (Pfizer/BioNTech & Moderna), there is good reason to believe that the building wave stateside won’t provoke another wave of lockdowns.

Perhaps equally important, we’re currently in one of the more volatile periods of the cycle. According to the Stock Traders Almanac, the middle portion of year 2 of a bull market cycle typically produces the greatest downside risk for US equities. If the bull market began in March 2020 off the lows, then that means “the middle portion of year 2” would be from July 2021 to November 2021.

There’s really no other way to put it: the delta variant is the wall of worry for markets. And as long as it sticks around as a concern, it means that stimulus will continue to flow from the Federal Reserve and the Biden administration, plain and simple.

Video Technical Notes: DXY Index

  • The DXY Index had been consolidating in a range carved out in the first week of July, between the July 6 low and July 7 high, but it appears that a bullish breakout is afoot. Bullish momentum is building, with the DXY Index above its daily EMA envelope, which is in bullish sequential order. Daily MACD is pushing above its signal line, while daily Slow Stochastics have entered overbought territory. The 85-point range suggests that the measured move above the 92.85 breakout level will see the DXY Index attempt to rally to 93.70 in the near-term. This would be a meaningful move, insofar as it would constitute a breach of the yearly high established in March at 93.44.

A Quieter Calendar

After what was the most important week of the month for economic data and events, this week is proving the exact opposite: there are only two ‘high’ rated events on the calendar through July 24. Until the European Central Bank policy meeting on Thursday, the lack of significant economic data means market participants are deprived of meaningful catalysts, likely keeping focus on the media narrative around the delta variant.

DailyFX Economic Calendar, ‘High’ Rated Events, Next 48-hours (Table 1)

Wall of Worry Builds as Financial Markets Focus on Delta Variant - Market Minutes

--- Written by Christopher Vecchio, CFA, Senior Currency Strategist

DailyFX provides forex news and technical analysis on the trends that influence the global currency markets.

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