Delta variant spooks investor sentiment amid heightened volatility

It is unlikely the Fed will begin to taper its stimulus programme amid a rise in Covid-19 cases and uncertainty surrounding its economic impact

The Fearless Girl statue in front of the New York Stock Exchange. Markets are bracing for increased volatility during the US Federal Reserve's Jackson Hole symposium later this week. AP

Markets have been trading largely higher in August, albeit amid heightened volatility. US equity markets hit near-historic highs and the US dollar strengthened against its major counterparts.

But it has not been a straightforward month for markets, thanks to the emergence of the Delta variant and its potential to prompt future lockdowns, spooking investor sentiment in the short term.

Some states in the US are tightening restrictions as the seven-day average of new cases sits at 150,000, the highest caseload since January, when it was peaking at 253,000 a week.

The US Federal Reserve also finds itself in a rather precarious situation. Until the emergence of the Delta variant, the market anticipated that the current $120 billion quantitative easing programme would be tapered at some point in 2021.

With the Jackson Hole Economic Symposium, an annual central banking conference that starts on Thursday, many had seen this meeting as a potential starting point for confirmation of the taper.

The Federal Open Market Committee, or FOMC, meeting minutes from earlier this month suggested that it could be appropriate to start tapering this year, perhaps as early as the FOMC's meeting in September.

While Jackson Hole has been historically known for announcing key policy measures, any such confirmation of a taper announcement is unlikely due to the Delta variant theme and the ensuing uncertainty surrounding its economic impact.

The Delta variant has already forced the central bank's symposium to be held online and I expect volatility to pick up when the meeting kicks off, particularly during chairman Jerome Powell’s speech, which is scheduled for Friday at 6pm UAE time.

Once again, I expect Mr Powell to continue to maintain the Fed's taper tones without giving a clear indication as to when markets can finally expect it.

Along with the Jackson Hole meeting, there are a couple of key data points I am keeping an eye on.

US durable goods orders are set to be released this Wednesday and will be another good indicator of the current condition of the US economy.

Initial jobless claims data, which have shown four consecutive weeks of lower claims, will be released on Thursday, along with the US gross domestic product print, which is not expected to spring any major surprises.

Personal spending data is due on Friday and caps the economic data points for this week.

Looking ahead, manufacturing data, which is due out on September1 and September 3, will be key data points for markets.

I expect the US Dollar Index, a measure of the value of the dollar against a weighted basket of major currencies, to hold below 94.07 through August.

Across the pond, the euro and sterling remained weaker against a strengthening greenback this month.

The Dubai Gold and Commodities Exchange's EUR/USD futures contract dropped below the 1.17 levels for the first time since November 2020, while the GBP/USD futures contract fell below 1.37 levels.

Despite improving growth forecasts for the euro area, the European Central Bank’s dovish stance towards monetary policy has not helped EUR/USD prospects and will continue to drag on prices throughout the month.

On the downside, a test of 1.1630 is a realistic prospect in the weeks ahead. The pound's prospects also continue to look anaemic in the weeks ahead. Technically, I see buying support coming in the channel between 1.3550 and 1.3580 and I do not expect a downside break through these levels.

Volatility returned to precious metal markets, with gold selling off more than 7 per cent at the start the month. DGCX Gold Futures broke through $1,700 and have slowly recovered since. I do not maintain a directional bias for gold in the short term and expect the precious metal to trade between $1,725 and $1,833 in the weeks ahead.

It has been an impressive second-quarter US earnings season, with more than 85 per cent of 470 S&P 500 companies beating estimates. As we approach the tail end of reporting, a few companies are left to report this week, but the most notable will be Salesforce, which is due out later on Wednesday.

And finally, Bitcoin continues its impressive rally this month – breaking through the key $50,000 level earlier on Monday after PayPal said it is now enabling cryptocurrency transactions for its UK clients. Expect cryptocurrency euphoria to continue in the weeks ahead, with downsides in Bitcoin capped at $44,000.

Gaurav Kashyap is head of futures at EGM Futures. The views and opinions expressed in this article are those of the author and do not reflect the views of EGM Futures