Despite the sharp declines seen at the end of last week, equity markets still finished higher for the second week in a row, with US markets still within touching distance of their all-time highs.
There appears to be an increasing nervousness, despite the gains of the last 100 days, that for all of the optimism over recent economic re-openings, that economies are reaching the limits of what they can do, without increasing the risk of a surging second wave of cases, as we head towards the autumn months.
The lacklustre nature of China’s economic rebound, as shown by its retail sales numbers last week isn’t a great leading indicator when it comes to a similar recovery in consumer spending elsewhere. Friday’s US retail sales numbers for July helped to reinforce some of these fears, coming in slightly below expectations, however when revisions were taken into account, they painted a picture which was mixed at best.
Rising tensions between the China and the US, after the cancellation of US/China trade talks, and the signing of an executive order by President Trump forcing China’s ByteDance to sell off its US operation within 90 days isn’t helping the overall mood either.
Asia markets have started the week on a mixed note with the latest Japanese Q2 GDP numbers showing that the world’s third biggest economy contracted by -7.8%, with private consumption sliding -8.2%, both by more than expected. In a development that is even more worrying is that industrial production in June only recovered a modest 1.9% significantly below expectations of 2.7%, and pointing to a weak recovery towards the end of Q2, as we look towards Q3.
As such equity markets here in Europe also look set to open on a mixed note with no clear sense of direction.
World Bank chief economist Carmen Reinhart warned at the weekend that the prospect of a V-shaped rebound driven by China was not a high probability, and that the recent rebounds in economic activity were merely driven by pent up demand and not symptomatic of a true recovery.
The implementation of quarantine measures, by the UK government, as well as others, in response to rising infection rates in other European countries is also raising the political temperature in a fashion that appears to be prompting knee-jerk responses that could exacerbate the economic damage all round.
Already we are seeing pressure being brought to bear with respect to furlough programs and the extension of them, as it becomes apparent that normal service is unlikely to resume for the foreseeable future when it comes to economic activity.
In a sign that Germany is already thinking along those lines, finance minister Olaf Scholz, suggested on German TV on Sunday, that the government was considering another €10bn to extend the job subsidy program.
This is only likely to increase the pressure on Chancellor of the Exchequer Rishi Sunak to consider similar measures beyond the current October deadline, as we get the latest look at the UK’s public finances for July, later this week.
US politics is also presenting a problem for investors, with little in the way of evidence that the delay to a new stimulus plan is causing damage to the US economy.
The latest stats on the US labour market suggest that the picture is continuing to improve, when it comes to weekly and continuing jobless claims. This lack of evidence of economic damage appears to be introducing an element of complacency into US lawmakers when it comes to crafting a new stimulus package, as they seem unable to look beyond their narrow partisan interests to agree a compromise deal, which would help the most vulnerable parts of US society.
It was a bad week for gold, sliding back sharply from recent record highs to post a bearish weekly reversal, raising the prospect of a period of consolidation after nine successive weeks of gains. The decline in gold prices was driven partially by a sharp rebound in bond yields, which appeared to be driven by a sharp rise in inflation expectations.
The US dollar has also continued to struggle after another negative week, its eighth in a row, as concerns over political divisions weighed on the currency.
This week’s focus is expected to be on the latest FOMC minutes, the restart of EU/UK trade talks as well as the latest UK public finance and retail sales data for July. We also have the latest flash PMIs from France, Germany and the UK.
EURUSD – while below the recent highs there is the risk that the euro is building up a topping pattern, with a neckline near the 1.1700 area. We need to push down through the 1.1720 to complete a move towards the 1.1680, and then 1.1500. The 1.1920 area remains a key resistance.
GBPUSD – a triangular consolidation appears to be unfolding, with resistance at the 1.3200 area, and support just above the 1.3000 area. A break below 1.2980 opens up the prospect of a move towards the 1.2770 area. We also have minor resistance at 1.3130.
EURGBP – appears range bound with support at the 0.8970/80 area, the euro needs to break above the 0.9080 level to retarget the 0.9130 level.
USDJPY – struggling to move beyond the 107.20 area. Support comes in at the 106.20 area with major support below that at 105.20.