European equity markets lost ground yesterday.
The sentiment was weak as the lack of agreement between Republicans and Democrats in the US in relation to the proposed coronavirus relief package impacted the mood. The political wrangling rumbles on and the situation was made worse by the threat from President Trump that he would press ahead with a stimulus package if the Democrats don’t play ball.
The US-China relationship has been in focus this week for the wrong reasons. According to Mike Pompeo, the US secretary of state, the Trump administration is making moves to ban the Chinese-owned apps - WeChat and TikTok - in the US. Concerns over national security have been cited as the reason behind the potential bans. Relations between the two largest economies in the world have been frosty lately, as things have been tense on account of the Beijing administration tightening its grip on Hong Kong.
The bullish run in US tech stocks continues. The NASDAQ 100 set a new record high and it closed up almost 1.3%. The broader S&P 500 rallied over 0.6%, but the small cap index, the Russell 2000, closed fractionally lower. The Russell 2000 is a better representation of the US economy than the other indices, so its clear underperformance is a little worrying.
Yesterday, the Bank of England kept interest rates at the record low of 0.1%. The asset purchase facility was maintained at £745 billion. The fact that monetary policy remained unchanged didn’t come as a surprise. The UK central bank now predicts the economy will contract by 9.5% this, and that’s a big improvement on the -14% forecast it issued in May. In 2020 and 2021, the unemployment rate is expected to be 7.5% and 6% respectively. The previous forecasts were 8% and 7% respectively. Sterling gained ground yesterday on the back of the improved outlook.
Overnight, China’s trade data for July was mixed. Exports increased by 7.2%, topping the 0.6% decline that economists were expecting. Imports dropped by 1.4%, and the consensus estimate an increase of 1%. China reopened their economy first, so it is concerning that their imports declined last month as it indicates that demand is weak. Regarding the exports, it is possible that health and safety equipment sales to western economies boosted the reading. The Reserve Bank of Australia warned that the recovery will take longer than previously predicted.
President Trump signed executive orders targeting Tencent and ByteDance, the owners of WeChat and TikTok respectively. A number of other Chinese companies were targeted too. The move by the Trump government will ban US companies from dealing with the firms mentioned - there will be a 45 day grace period. The rising tensions has hit stocks in China, Hong Kong, Japan and Australia. European stocks markets are called lower.
Judging by the latest jobs data, the US economic recovery is continuing. The initial jobless claims update was 1.18 million, and that was a drop from the 1.43 million in the previous week. The continuing claims metric fell from 16.95 million to 16.1 million. The announcements point to a firmer labour market.
The US non-farm payrolls will be released at 1.30pm (UK time) and the consensus estimate is 1.65 million, and that would be a big drop off from the 4.8 million jobs that were added in June. The unemployment rate is tipped to be slip from 11.1% to 10.5%. The average earnings reading is expected to cool to 4.2% from 5%. In a normal environment, a decline in wages would be seen as bad for the economy as lower wages typically equates to lower consumer spending. In the current climate, a fall in earnings is probably a sign that lower income earners are returning to the workforce. A huge chuck of the retail and hospitality sectors were put out of commission on account of the pandemic, but the reopening of the economy has seen a jump in the number of people going back to work. The labour market has been recovering in recent months and traders will be keeping an eye the rate at which new jobs are being created. Some states have paused the re-opening of their economies so that is likely to have an impact on the jobs market.
On Wednesday, the ADP employment report showed that only 167,000 jobs were added last month, while economists had pencilled in 1.5 million jobs. The dreadful report was balanced out by the fact the June report was revised from 2.36 million to 4.31 million. In light of the colossal revision to the ADP number, dealers will be keeping an eye out for any revisions.
There seems to be a lack of direction in the US dollar. Yesterday, it fell to a fresh two year low, then it rebounded, and then it turned over on itself to essentially finish flat on the session.
Traders might have been indecisive in relation to the US dollar but the rally in gold and silver continued. Gold printed yet another record high, while silver notched up a new seven year high. The absence of a firm greenback helped the precious metals.
At 7am (UK time) the German industrial production reading for June will be posted and economists are expecting 8.1%, and that would be an increase from the 7.8% posted in May. At the same time, German trade data will be revealed. Imports and exports are anticipated to be 10.9% and 13.3% respectively.
French industrial production is expected to cool to 8.9% from 19.6% in May. The update will be announced at 7.45am (UK time).
The Halifax HPI report for July is expected to show an increase of 0.2%. It will be posted at 8.30am (UK time)
Canada will post its jobs data at 1.30pm (UK time). The unemployment rate is tipped to dip to 11% from 12.3%. The employment change is expected to show an increase of 400,000, which would be a big fall from the 952,900 in June.
EUR/USD – retreated a little from its highest level in over two years. If the bullish run continues it might target 1.2000. Support could come into play in the 1.1700 area, or the 1.1600 zones.
GBP/USD – hit its highest level in almost five months yesterday, and while it holds above the 1.3000 mark, the bullish trend should continue. 1.3200 might act as resistance. A move through 1.3000 might put the 1.2900 area on the radar.
EUR/GBP – has been moving lower in the past week and a break below 0.9000, might see it target 0.8933, the 100 day moving average. If it holds above 0.9000, it might retest 0.9175.
USD/JPY – last Friday’s candle has the potential to be a daily bullish reversal. If it moves higher from here, it might run into resistance at the 50 day moving average at 107.05. A break below 104.00 should put it on the road to 102.00