We saw a decent week of gains for markets in Europe last week, helping to reverse the negative start to the month, however it was a different story for US markets which saw them post their second successive week of declines, with the Nasdaq leading the way.

Having helped lead US markets from their March lows, there are rising concerns that some US valuations are becoming stretched at a time when political uncertainty is on the rise ahead of the US election in November.

This nervousness appears most prevalent amongst tech stocks simply down to the prospect that they could be in the firing line for increased taxation in the event of a Biden win. It’s no secret that the Democrats think that a lot of US companies don’t pay anywhere near enough tax, and just like in 2016, the tech and pharmaceutical sectors could well end up in Democrat cross hairs.

The failure of US politicians to agree a new stimulus deal isn’t helping sentiment either, at a time when there are concerns that the US economy is on the cusp of a Wile E Coyote moment, despite a jobs market which has continued to hold up fairly well.

Last week we also found that progress towards a Covid-19 vaccine was encountering a few problems, which while not unexpected given the newness of the virus, raised the prospect that for all the optimism about a vaccine by year end, the reality is that it’s unlikely to be that simple. The news over the weekend that AstraZeneca clinical trials had resumed is likely to be well received, however it is unlikely to assuage concerns that the speed with which these trials are being done, could result in a vaccine being rushed out too hastily, with unforeseen circumstances.

Despite these concerns European stocks managed to eke out a gain last week, and look set to open higher again as we start a new week, driven largely by M&A activity over the weekend.

These gains are taking place despite concerns over rising infection rates, both here in the UK, as well as in Europe with some restrictions being tightened again. While this is undoubtedly a cause for concern, the rise in infection rates also needs to be set in the context of how much more testing is being done now relative to in April and May when the R rate was much higher, and testing was lower.

If you test more, you are going to find more cases, and what appears to be being overlooked is that for now hospitalisations, along with death rates, still remain very low and hopefully will continue to remain so. This is where people’s attention should to be focused, given that for the most part infected people are only displaying mild symptoms.

M&A appears to be the main focus as we start a new week with US pharma company Gilead Sciences buying cancer drug maker Immunomedics for $21bn, while Softbank appears to have finally agreed a price with US graphics chip maker NVidia, for UK chip company ARM Holdings of $40bn, as it seeks to bolster its balance sheet after a rather troubled 2019, as well as the recent scrutiny of its big derivative bets on some big US tech shares. Softbank shares have moved sharply higher in Asia trading this morning on news of the sale, however this optimism needs to be tempered. Not least because the proposed sale has already attracted the attention of the UK government with respect to the thousands of UK jobs based in and around Cambridge, with the CMA likely to take an interest in the sale.

The government is likely to want assurances that NVidia won’t do what Cadbury did with respect to any assurances regarding UK jobs and say one thing and do another. This means there is a high chance that NVidia may well find it much more difficult then Softbank did when they bought the business under the previous government. .  

The US dollar also appears to be showing some signs of life, posting its second successive weekly gain, after several weeks of losses, as concerns about rising coronavirus infection rates in Europe start to take the gloss off the recent rise in the euro, and the prospects for a continued improvement in economic activity across the region as we head into the colder autumn and winter months.

The pound has also had a wretched run in recent days, though that has had more to do with the return of no deal Brexit anxiety than anything else. The breakdown in EU/UK trade talks, and escalated rhetoric, with accusations of bad faith flying in both directions has increased the prospect that we could well see a no deal outcome. The reality is that for all the talk of an October deadline, is that this type of brinkmanship is likely to continue right up to the 31st December deadline. As with everything with the EU talks tend to go right up to the deadline and this time is unlikely to be any different.  

It is highly unlikely that the EU will walk away from talks at this stage, however it is becoming increasingly difficult to envisage a situation, where either party can return to business as usual, whatever the outcome of the current trade negotiations.  

It’s set to be another big week for central banks, after last week’s ECB rate decision, and the verbal gymnastics being performed by President Christine Lagarde, along with other members of the governing council about the recent rise in the value of the euro.

Whatever their various views on the value of the euro, the reality is that its direction will largely be dictated by the strength or otherwise in the value of the US dollar, and with the latest Federal Reserve rate meeting later this week, there is a risk that in outlining their plans for their new policy of “AIT” average inflation targeting, that the US dollar might well weaken further. In outlining the new policy at the recent virtual Jackson Hole symposium, markets will be looking for some flesh on the bones, which means that the US dollar could well weaken further.

If the Fed is serious about trying to boost inflation then they won’t want a stronger US dollar. That is likely to be bad news for the euro, where a strong currency has a significant deflationary effect.

EURUSD – the neckline that has been in place since early August continues to support the price action, though there is some evidence that the euro may well be struggling to maintain momentum. Last week’s failure above 1.1900, suggests failing momentum, with a break below 1.1720 suggesting a move towards 1.1500.  Above 1.1920 retargets the 1.2000 area.  

GBPUSD – last week’s sharp fall through the 1.3020 level has seen the pound find support at the 200-day MA and 1.2750 area. A move below 1.2730 opens up the prospect of further losses towards 1.2500. We need to see a recovery back above the 1.3030 area to stabilise.  

EURGBP – the move up through the June highs at 0.9180 opens up the prospect of a move towards the 0.9400 area. A move back below the 0.9170 area opens up the prospect of a move back to the 0.9080 area.

USDJPY – finding it difficult to break above the 107.20 area for the time being, with solid support at the 105.00 area. We need a break either side of this range to determine the next move.

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Disclaimer: CMC Markets is an order execution-only service. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.