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Europe called higher, US stimulus talks in focus

Europe called higher, US stimulus talks in focus

Optimism in relation to the US stimulus package lifted sentiment in markets last week. 

On Friday, the FTSE 100 hit a three week high, and the DAX 30 hit its highest level in over two weeks. Not long after the end of the European trading session, President Trump tweeted that the coronavirus relief package negotiations are progressing, and that acted as another boost to US indices – the Dow Jones and the S&P 500 hit their highest levels since early September.

The update from President Trump caught traders’ attention but there wasn’t a whole lot of substance behind the tweet. Mitch McConnell, Senate majority leader, said that it was ‘unlikely’ that a deal would be agreed upon before the Presidential election – which is taking place in early November. It was reported that the Republicans raised their proposal for the stimulus package from $1.6 trillion to $1.8 trillion. The Democrats are pushing for a $2.2 trillion package, so a large gulf still exists with respect to what both sides want.  The fact the Republicans upped their offer is a least a step in the right direction. Yesterday, Nancy Pelosi, of the Democrats, claimed that talks are still at an impasse.

Stocks in mainland China and Hong Kong are showing strong gains while the Japanese market is a little lower. The Chinese central bank has made it cheaper to short the yuan, so the onshore yuan has dipped a little as traders took that as a sign the regulator is content for the currency to drift lower. European equity markets are set to build on Friday’s gains. 

The risk-on attitude of traders put pressure on the US dollar. In recent months the greenback has typically benefitted from negative moves in stocks as the currency has become a popular destination for safe-haven flows. On Friday, the US dollar index fell to its lowest level in over two weeks.

Gold was assisted by the slide in the US dollar. The metal is traded in dollars so the weakness in the currency pushed up the yellow metal, and it hit a level last seen over two weeks ago. Gold hit a record high in early August, and even though in endured a large pullback in August and September, the broader uptrend is likely to continue, should it remain above the $1,900 mark.  

Oil finished lower on Friday but it enjoyed a major rally in the previous four sessions. Supply concerns hit the energy market. During the week, news stories of a hurricane being bound for the Gulf of Mexico dominated the headlines. The hurricane was upgraded from category 2 to category 3, and because of the evacuation of oil workers, output in the region fell over 90% - the largest fall since Hurricane Katrina in 2005. Natural gas production fell by over 60%. Oil workers were on strike in Norway, and that was a factor in oil’s positive move too. At the end of last week the strike action was called off.

The UK-EU trade talks will be in focus this week as Boris Johnson’s self-imposed deadline of 15 October will on dealers’ minds. The UK Prime Minister stated a few weeks ago that if a meaningful trade agreement hasn’t been set out by 15 October, the British negotiating team will leave the talks.

The EU has mentioned a deadline of late October. Both sides have said that progress has been made but differences will still remain. In a way, the teams have to threaten to walk away or else the other side would take advantage. The prospect of the UK and the EU trading on basic WTO terms come 2021 is daunting but sterling has been holding up relatively well when you take into account what is at stake. Over the weekend, Mr Johnson told Germany’s Angela Merkel that differences still remain with respect to the talks. 

There were some concerns for the health of the British economy as the GDP reading for August showed that the economy only grew by 2.1%, which was a big drop-off from the 6.6% growth that was registered in July. The government’s scheme to assist the hospitability sector – Eat Out to Help Out – took place in that month, so it is a little concerning that economic activity cooled despite the incentive.

Canada’s rebound seems to be going well as the unemployment rate fell to 9% in September from 10.2% The consensus estimate was 9.7%. The employment change report showed that 378,200 jobs were added last month, and that smashed the 156,600 consensus estimate. It was also a big increase on the 245,800 registered in August. 

Andrew Bailey, the head of the Bank of England, will be speaking at the Citizens Panel Open Forum at 5pm (UK time).                

EUR/USD – has been moving lower since early September and while it holds below the 50-day moving average at 1.1801, the bearish move should continue, and it might find support at 1.1566, the 100-day moving average. If the wider bullish trend continues, it should target 1.2000.  

GBP/USD – has been moving higher for over two weeks and if the positive move continues it might target 1.3269. Support might be found at 1.2802, the 100-day moving average. 1.2675 might provide support too.   

EUR/GBP – since mid-September it has been edging lower and a break below 0.9000 might put 0.8864 on the radar. A rebound might run into resistance at 0.9157.    

USD/JPY – began its rebound over two weeks ago and while it holds above 105.28, the recent uptrend should continue and it could target 106.50, the 100-day moving average. A break below 104.94, should put 104.00 on the radar.

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