Politics was the name of the game yesterday as equities were largely influenced by the goings-on in relation to the proposed US stimulus package, and sterling was dragged around by the back and forth of the UK-EU situation.
Broadly speaking, stock markets in Europe and the US posted small gains. There was some optimism doing the rounds that US politicians were making headway in relation to achieving a compromise with respect to the coronavirus relief package. The Democrats were pressing for a $2.2 trillion scheme, while the Republicans were talking about a $1.6 trillion programme. By the close of trading in the US no major progress towards striking an agreement was made. It was reported that Nancy Pelosi, from the Democrats, would continue discussions with Steven Mnuchin, the Treasury secretary. The fact that negotiations haven’t broken down was seen as a positive.
A short while ago it was announced that Donald Trump tested positive for Covid -19, so no doubt he will quarantine. This put pressure on US index futures and European indices are called lower.
Last night, the House of Representatives passed a $2.2 trillion stimulus package bill, but there isn’t much hope that the Senate will sign-off on it given that the Republicans are in a majority. Pelosi indicated that there is still a chance a deal will be struck before the presidential election. Many of the major stock markets in Asia are closed because of holidays. The Nikkei 225 is lower due to the Trump health story.
The US non-farm payrolls report will be announced at 1.30pm (UK time). The consensus estimate is for 850,000 new jobs in September, which would be a fall from the 1.37 million jobs created in August. The unemployment rate is expected to dip to 8.2% from 8.4%. The average earnings reading is anticipated to increase to 4.8% from 4.7%. In normal circumstances, a rise in earnings would typically be seen as positive, as people who earn more tend to spend more. Lately, wages have been falling because more people on lower incomes returned to the labour market. Should wages rise that could be seen as a sign there has been fewer people from the hospitality and retail sectors are back in work. The jobs report will be in focus from a political point of view because it could influence the Trump administration with respect to the proposed coronavirus relief package. The Republicans might be less inclined to reach a compromise, should the jobs data be well-received.
Sterling saw a lot of volatility yesterday as turbulence in relation to the UK-EU relationship continued. The EU announced it would be starting legal proceeding against the UK because of the internal markets bill – which was passed by the House of Commons – would mean the British government would be in breach of international law with respect to the withdrawal agreement. The news put pressure on the pound even though it was pretty clear for a while that Brussels was going to do down that route. The pound fluctuated during the day and in the afternoon it came under renewed pressure when it was announced that differences still existed on the topic of fishing rights.
Prime Minister Johnson previously announced that if a deal is not put in place by 15 October, the British negotiating team would walk about way from the talks. That deadline is now less that two week away. The EU has a track record of striking deals at the last minute or is some cases not long after the deadline, so the toing and froing is likely to drag on for a while. It is unlikely that the pound will drive higher until the situation has been cleared up.
The oil market suffered yesterday as traders were worried about supply, and the health crisis prompted concerns about demand. OPEC announced that output in September increased by 160,000 barrels per day when compared with August. The oil group pointed out that Iran and Libya are not constrained by the coordinated production cuts. The rising number of new Covid-19 cases was also a factor in oil’s decline so traders took the view that demand would be hampered.
Yesterday saw the release of the latest manufacturing reports from Europe and the US. The major eurozone economies all posted increases on the month, while the UK reading was a touch lower, and so were the updates from the US.
Recently the Fed said they would be content for the inflation rate to rise above 2% for some time. The core PCE reading is the central bank’s preferred measure of inflation and yesterday it increased to 1.6%, so that points to firmer demand in the US, and that adds weight to the argument the economy is recovering.
Oil wasn’t the only commodity to suffer as copper also endured a painful decline. The red metal is typically seen as a good barometer for global demand so the sizeable drop might also point to fears for future demand.
At 10am (UK time), the eurozone flash CPI reports will be posted. The headline reading is tipped to remain at -0.2%, while the core report is expected to increase to 0.5% from 0.4%. The core report strips out volatile price components such as commodities, and it is considered to be a better gauge of underlying demand. The European Central Bank said they are ready to alter their policy should the economic landscape change, so the CPI indicators will be closely watched.
The final reading of the University of Michigan consumer sentiment is expected to be 79. The reading will be announced at 3pm (UK time).
EUR/USD – has been moving lower since early September and while it holds below the 50-day moving average at 1.1803, the bearish move should continue, and it might find support at 1.1515, the 100-day moving average. If the wider bullish trend continues, it should target 1.2000.
GBP/USD – is in a downtrend and if the negative move continues it might encounter support at 1.2480. A rebound could run into resistance at 1.3031, the 50-day moving average.
EUR/GBP – while it holds above 0.9070, the wider bullish trend should continue. A break above 0.9291, should put 0.9388 on the radar. A move below 0.9070, should bring 0.9000 into play.
USD/JPY – while it holds below the 50-day moving average at 105.75, the broader bearish move is likely to remain intact. 104.00 might act as support. A break above 105.75, could see it target 106.61, the 100-day moving average.