Most major EU indices slid yesterday, perhaps due to Eurozone’s disappointing inflation data, which may have increased the chances for more stimulus by the ECB. However, sentiment improved during the US session, with the S&P 500 and Nasdaq hitting new records, fueled by a rally in tech stocks, as well as by economic data, with the ISM manufacturing PMI rising to its highest since November 2018.
The dollar traded higher against all but one of the other G10 currencies on Tuesday and during the Asian morning Wednesday. It underperformed only against NZD, while it gained the most ground versus NOK, CHF, SEK, and EUR in that order.
The strengthening of the dollar suggests that market participants traded in a risk-off fashion yesterday. However, the strengthening of the risk-linked Kiwi and the weakening of the Swiss franc point otherwise. Therefore, 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, most major EU indices traded in the red, with UK’s FTSE 100 being the main loser (-1.70%). The UK index was closed on Monday, and thus, its fall may have been a catch up after Monday’s decline in other European equity indices. Having said that, appetite improved during the US session, with Nasdaq gaining the most (+1.39%). In Asia today, things were more mixed, with Japan’s Nikkei 225 and South Korea’s KOSPI gaining 0.45% and 0.38% respectively, but with China’s Shanghai Composite sliding 0.10% and Hong Kong’s Hang Seng being virtually unchanged.
EU indices may have slid due to Eurozone’s disappointing preliminary inflation data. The headline rate slid into negative territory for the first time since May 2016. Specifically, it slid to -0.2% yoy from +0.4%, instead of declining to +0.2% as the forecast suggested, while the core rate fell to +0.4% from +1.2%. In our view, weak inflation data may have increased the chances for the ECB to expand its efforts to stimulate the Euro-area economy. The improvement during the US session may have been the result of further rise in technology stocks. Apple Inc rose just under 4% following a report that the company asked its suppliers to make at least 75mn 5G iPhones for later this year, while Zoom Video Communications surged 40.8% after the company raised its annual revenue forecast by more than 30%. Economic data may have also helped, with the ISM manufacturing PMI rising to 56.0, its highest since November 2018. On top of that, US Treasury Secretary Steven Mnuchin said that he was willing to provide more money for state and local governments, while White House chief of staff Mark Meadows said that Senate Republicans are likely to present a renewed coronavirus-aid bill next week, offering USD 500bn in additional federal aid.
As for our view, it has not changed yet. With central banks and governments around the globe staying willing to do whatever it takes to support their economies from the effects of the pandemic, and with headlines surrounding a potential vaccine coming on the bright side, we would still consider the latest retreat in most equity indices as a corrective phase. With the S&P 500 and Nasdaq hitting fresh records, we still see decent chances for a rebound in other indices and other risk-linked assets, something that could continue weighing on safe havens.
The German DAX continues to balance above its short-term downside resistance line drawn from the high of July 21st, which got broken on August 24th. At the same time, the price is still hovering above its short-term upside support line taken from the low of July 31st, which suggests that the bulls are not giving up yet. There is a chance the index could move higher again. That is, of course, if the price remains above both of the aforementioned short-term lines. In order to get a bit more comfortable with examining further upside, a break above yesterday’s high, at 13129, would be needed. Until then, we will take a somewhat bullish approach.
A strong move above the previously-discussed 13129 barrier could invite more buyers into the game, possibly pushing the price to the 13262 zone, or even the 13315 hurdle, marked by the highs of August 26th and July 21st respectively. DAX might stall there for a bit, or even correct a bit lower, however if it stays somewhere above the 13129 area, the bulls may take charge again. If the buyers are able this time to overcome the 13315 barrier, that would confirm a forthcoming higher high, potentially clearing the path to the 13500 level, marked near the low of February 21st.
On the other hand, if the price suddenly drops below all of the previously-discussed short-term lines, the upside and the downside ones, that may scare the buyers from the arena temporarily. Such a move might also place DAX below yesterday’s low, at 12849, which will confirm a forthcoming lower low. The German index could slide further south and hit the 12750 obstacle, or even the 12629 hurdle, marked by the low of August 21st. The price may stall the for a bit, but if the bears still feel that they can dominate the field, that could cause DAX to fall even further, where the next possible support area might be at 12515. That area is marked near the lows of August 6th and 7th.
For the past week, NZD/JPY has been on a steep uprise, while balancing above a short-term upside support line drawn from the low of August 25th. Although the RSI and the MACD on our 4-hour chart are showing signs of topping, we still have not received any signal for a possible reversal. As long as the rate remains above that upside line, we will stay positive with the near-term outlook.
If NZD/JPY makes a move a bit further up, the next potential resistance might be seen at 72.09, marked by the low of January 24th. If the pair gets a temporary hold-up there, it may correct slightly lower, moving all the way back to the aforementioned upside line. If that line doesn’t allow NZD/JPY to move lower, the bulls could take advantage of the lower rate and step in again. That may help it climb back to the 72.09 obstacle, a break of which might set the stage for a push to the 72.67 level, marked by the high of January 24th.
Alternatively, if the rate breaks the aforementioned upside line and then slides below yesterday’s intraday swing low at 71.40, that could spook the remaining bulls from the field for a while. NZD/JPY might then drift to the 71.20 obstacle, or even to the 70.92 hurdle, marked by the low of August 31st. The pair may stall there temporarily, but if the sellers are still feeling quite confident, a break of that hurdle could clear the way to the 70.51 level, which is the low of August 28th.
During the US session, the ADP employment report for August is scheduled to be released. The report is expected to show that the private sector has gained 900k jobs in August, more than the 167k gain during the month of July. This may raise speculation that the NFP print, due out on Friday, may fall short of its own forecast, which is at 1.400mn. Nevertheless, as we noted several times in the past, the ADP is far from a reliable predictor of the NFPs. Even last month, when the ADP number was at 167k, the NFPs came in at 1.763mn.
With regards to the energy market, we get the EIA (Energy Information Administration) report on crude oil inventories for last week. The forecast points to a 1.887mn barrels slide following a 4.689mn decline the week before. That said, bearing in mind that the API (American Petroleum Institute) reported a 6.360mn barrels decline, we would consider the risks surrounding the EIA forecast as tilted to the downside, something that could prove positive for oil prices.
As for the speakers, we have five on today’s agenda: New York Fed President John Williams, Cleveland Fed President Loretta Mester, Minneapolis Fed President Neel Kashkari, BoE Deputy Governor Ben Broadbent, and BoE Chief Economist Andy Haldane.
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