Tensions between the US and China were the main story yesterday, and that weighed on equity sentiment.
The relationship between the two largest economies in the world has been deteriorating in recent months. The Hong Kong situation, the forced closure of consulates, and the crackdown on TikTok in the US have all contributed to the increasingly hostile relationship between the two nations. The Trump administration announced tougher restrictions on Huawei – the Chinese telecoms company. The US government will clamp down on the firm’s access to commercially available chips.
The US-China standoff is different to the trade spat era, where Mr Trump was a lot more vocal, and it seemed as if he wanted to be seen to be verbally attacking China. Seeing as he has an election to fight in a few months, he is taking a different approach. No doubt he will use the Chinese government as a bogeyman when he is on the campaign trail, but given the state of the US economy, he is unlikely to do anything too aggressive for fear the Beijing administration might launch a tough economic attack.
European equity markets finished lower yesterday. The FTSE 100 incurred the largest loss as the rally in the pound put extra pressure on some of its bigger constituents. Sterling might see some volatility as traders will be closely watching the UK-EU trade negotiations. It was reported that UK truckers’ access to the EU’s single market is likely to be a sticking point in the talks.
Despite the tensions with China, and the lack of a coronavirus stimulus package, the NASDAQ 100 and the S&P 500 closed at record levels. A few of the bit hitters, such as Amazon and Netflix played a big role in the indices rally. The small cap, Russell 2000 index, finished nearly 1% lower, so the wider sentiment is less rosy.
Equity benchmarks in Asia are mixed. The Chinese government denounced the US’s decision in relation to Huawei. On an annual basis, Japan’s exports in July fell by 19.2%, while economists were expecting a fall of 21%. The update highlights the large fall in international demand.
The US dollar’s decent continued yesterday as it fell to a new 27 month low. The upbeat housing data couldn’t drag traders’ attention away from the fact the Republicans and Democrats still haven’t reached a stimulus deal. It was reported that Nancy Pelosi, the house speaker, suggested the Democrats could scale back their demands in an effort to secure an agreement.
US building permits reading for July was 1.49 million, a six month high. The housing starts update for last month was also 1.49 million, and that was the highest level in five months. It is possible the decent updates are just down to pent-up demand, which could fizzle out in the months ahead.
Impressive second quarter updates from Home Depot and Walmart yesterday also point to firm demand in the US economy. A certain amount of the positive momentum is likely to be lost, but the big question will be, how much.
Gold had a positive move yesterday thanks to the side in the dollar. The commodity has seen some big swings this month as it reached an all-time high in early August. That was followed by a sizeable pullback at the start of last week, but since Wednesday, it has been recouping those losses. Metals broadly had a positive run yesterday as copper, silver and platinum pushed higher. A bullish move in metals that typically have industrial uses is usually seen as a sign that traders are optimistic about the health of the economy.
At 7am (UK time), the UK CPI reading for July will be posted and economists are expecting the level to remain at 0.6%. The core reading, which strips out commodity prices, is tipped to cool to 1.3% from 1.4% in June. Traders will be looking out for any signs that demand is picking up. Keep in mind that last week we saw a surprisingly large jump in US headline and core CPI, and it’s possible we might see something similar with the UK numbers.
Eurozone CPI will be posted at 10am (UK time). The final reading of the headline number is expected to be unchanged from the flash reading of 0.4%, and that would be a slight improvement on the 0.3% recorded in June. The core metric is anticipated to be 1.2%.
At 1.30pm (UK time) Canada will release its inflation report and the consensus estimate is 0.5%, which would be a fall from the 0.7% posted in June.
Oil will be in focus as the EIA report is expected to show that oil and gasoline inventories will fall by 2 million barrels and 1 million barrels respectively. A decline in energy inventories is likely to be viewed as a sign that demand is on the rise. OPEC+ will meet to discuss their current output plan.
At the end of last month, the Fed kept rates on hold, meeting expectations. The central bank promised to do what it takes to assist the economy. In addition to that, the Fed extended the dollar swap lines and the repo facility until the end of March 2021. The minutes from that meeting will be released at 7pm (UK time).
EUR/USD – has been in an uptrend since April and if the bullish run continues it should target 1.2000. A pullback might find support at 1.1696 or at the 1.1600 zone.
GBP/USD – while it holds above the 1.3000 mark, the bullish trend that has been in place since late June should continue, and it might target 1.3284. A move back below 1.3000, could see it target the 1.2800 zone.
EUR/GBP – it has been largely range bound in August, but while it holds above the 0.9000 mark, the bias should remain to the upside. Resistance might be found at 0.9157. The mid-July low of 0.8938 might act as support.
USD/JPY – the rebound from late July to mid-August seems to be turning over on itself and while it remains below the 50-day moving average at 106.66, it is likely to lose further ground. 105.30 or 104.18 might act as support. A rally might encounter resistance at 108.06, the 200 day moving average.
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