Although European equities traded in narrow ranges yesterday, US indices gained more than 1%, perhaps due to signs of progress in the development of a potential coronavirus vaccine, as well as by several multibillion-dollar deals. The upbeat morale, although softer, rolled over into the Asian session today, aided by better-than-expected Chinese data. What’s more, the UK Parliament voted in favor of a bill that is set to override key parts of the Brexit withdrawal agreement, but the pound did not react.
The US dollar traded lower against all the other G10 currencies on Monday and during the Asian morning Tuesday. It underperformed the most versus AUD, JPY, EUR, and GBP in that order, while it lost the least ground versus CAD and NOK.
The weakening of the US dollar, combined with the strengthening of the risk-linked Aussie, suggests that markets traded in a risk-on fashion yesterday. However, the fact that the yen was among the main gainers, points otherwise. Thus, in order to get a clearer picture with regards to the broader market sentiment, we prefer to turn our gaze to the equity world. There, major EU indices traded within a narrow range of ±0.15%, with the only exception being the French CAC 40, which gained 0.35%.
That said, investors’ appetite improved during the US session, perhaps due to signs of progress in the development of a potential coronavirus vaccine, as well as by several multibillion-dollar deals. Drugmaker AstraZeneca resumed its UK clinical trials, after being suspended last week, while Pfizer Inc and BioNTech SE proposed to expand their Phase 3 vaccine trial to about 44k participants. With regards to the deals, Nvidia Corp announced plans to buy the UK-based chip designer Arm from Japan’s SoftBank Group Corp for as much as USD 40bn, while Oracle said it would team up with China’s ByteDance to keep TikTok operating in the US, in a deal structured as a partnership rather than an outright sale.
The upbeat morale, although softer, rolled over into the Asian session today, aided by better-than-expected Chinese data. Industrial production accelerated to +5.6% yoy from +4.8%, instead of growing +5.1% as the forecast suggested, while retail sales rebounded +0.5% yoy from -1.1%, beating estimates of +0.1%. Fixed asset investment was also slightly better, as it slid less than anticipated. Here, the exception is Japan’s Nikkei 225, which slid 0.50%, even after Japan’s Chief Cabinet Secretary Yoshihide Suga won the governing party’s election. Suga seems to be in favor of Abenomics and thus his election is a positive for the stock market in our view. Maybe Nikkei slid on a “sell the fact” reaction as Suga was widely anticipated to win. In any case, we don’t expect the slide to last for long. We see decent chances for Nikkei to rebound soon.
Actually, as we noted in the past, we see decent chances for the broader appetite to improve and for most of the major stock indices to continue drifting north. With major central banks and governments willing to do whatever it takes to support the global economy, and with headlines over a potential vaccine coming on the bright side, we believe that the path of least resistance for equities and other risk-linked assets may be to the upside. At the same time, safe havens, like the US dollar and the yen, may come under renewed selling interest. We repeat that among our favorite pairs for gauging the broader market sentiment are AUD/USD and AUD/JPY, as they consist of a risk-linked currency and a safe-haven one. Therefore, when investors are optimistic, these pairs tend to trade higher, while the opposite may be true during periods of fear or cautiousness.
Last week, the Dow Jones Industrial Average index rebounded from its medium-term upside support line taken from the low of June 15th. Yesterday, the US index continued moving north and looking at our 4-hour chart, we can see that the price is back above all of its EMAs. However, to get a bit more excited about higher areas, we will first wait for a push above the high of September 9th, at 28207.
If DJIA eventually makes its way above that 28207 barrier, that may interest a few more buyers to join in, possibly opening the door to the high of last week, at 28421, or to the high of September 4th, at 28610. Initially, the price might get a temporary hold-up there, but if the bulls are still in control, a break of that September 4th high could open the way to the 28809 zone, marked by the highest point of August.
Alternatively, in order to see a possible change in the trend, a break of the aforementioned upside line and a price-drop below the 27445 hurdle, marked by the lows of September 10th and 11th, may be needed. That could clear the path to the current lowest point of September, at 27197. If that is still not enough for the sellers, the index might slide to the 27030 zone, which is the low of June 6th. DJIA could stall there for a bit, or even correct slightly higher. That said, if the US index remains below the 27197 hurdle, or the aforementioned upside line, there might be a possibility of seeing another drop. If this time the 27030 obstacle breaks, this may open the door for a move to the 26786 obstacle, or even the 26548 level, marked by the low of August 6th.
AUD/USD continues to balance above a short-term tentative upside support line drawn from the low of June 30th. This morning, the pair had already moved slightly above last week’s high, at 0.7324, which suggests that the bulls are still willing to keep the fight going. The RSI and the MACD on our 4-hour chart are pointing higher and support the idea of seeing the pair moving a bit further north, at least for now.
A move above the aforementioned 0.7324 barrier could bring the rate to the 0.7340 obstacle, a break of which may clear the way to the 0.7381 area, marked by the high of September 2nd. AUD/USD might get a hold-up there, or even correct a bit lower. However, if the pair stays above the 0.7340 hurdle, or the 0.7324 zone, the bulls might take advantage of the lower rate and lift it up again. If so, AUD/USD could travel higher and try to bypass the 0.7381 area again and if it succeeds in doing that, the next potential resistance may be seen near the current highest point of September, at 0.7414.
On the other hand, if the pair suddenly breaks below the previously-discussed upside line and drops through the 0.7222 hurdle, marked by an intraday swing high of September 9th, that could open the door for a further decline, as more sellers might see it as a good opportunity to jump in. AUD/USD may then drift towards the current lowest point of September, at 0.7192 zone, where the rate could get a temporary hold-up. That said, if the selling interest is still high, the bears might continue applying pressure on AUD/USD, potentially sending it further south, where it might end up testing the 0.7150 obstacle, or the 0.7135 level, marked by the lows of August 25th and 20th respectively.
During the early European morning, the UK employment report for July is coming out. The unemployment rate is forecast to have ticked up to 4.0% from 3.9%, while average weekly earnings including bonuses are anticipated to have fallen at a faster pace than in June. Specifically, the yoy earnings rate is expected to have ticked down to -1.3% from -1.2%. The excluding bonuses rate is forecast to have held steady at -0.2% yoy. That said, according to the KPMG and REC UK report on jobs, starting and temp pay fell markedly, but with the rates of decline easing since June. In our view, this shifts the risks of the earnings rates somewhat to the upside.
That said, we expect GBP traders to keep their gaze locked on developments surrounding the political landscape and the Brexit sequel. Yesterday, the UK government won an initial Parliamentary vote on a bill that is set to override key parts of the withdrawal agreement with the EU. The pound did not react to the outcome, but we believe that the risks surrounding the currency’s forthcoming direction are tilted to the downside. The EU has urged the UK to scrap the bill by the end of September, with the UK government refusing to do so. In our view, this lessens the chances of a trade accord before the self-imposed October deadline, and increases the chances for a no-deal Brexit at the end of the year, when the transition period expires.
From Germany, we get the ZEW survey for September. The current conditions index is forecast to have risen to -72.0 from -81.3, while the economic sentiment one is anticipated to have slid to 69.8 from 71.5. Eurozone’s wages and the Labor Costs index, both for Q2, are coming out, but there is no forecast available for neither release.
Later, in the US, we have industrial production for August and the API (American Petroleum Institute) report on crude oil inventories for last week. Industrial production is forecast to have slowed to +1.0% mom from +3.0%, while, as it is always the case, no forecast is available for the API print.
We also have one speaker on today’s agenda, and this is ECB Executive Board member Fabio Panetta.
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