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Europe set for small recovery

Europe set for small recovery

Traders were in risk-off mode yesterday as the deteriorating health crisis and the ramping up of restrictions weighed on market sentiment.

There was a feeling that things are going backward as there was a jump in the number of Covid-19 cases, and governments are adopting tougher measures to try and get a grip on the situation. The news that Spain declared a state of emergency highlights how bad things are in the country. Curfews are in place in Spain, Italy and France. Germany is coming under pressure from the health emergency too. Recently, various parts of the UK have introduced stricter restrictions. Dealers are fearful it is going to be a difficult few weeks or possibly months ahead.

The optimism of the summer has been replaced by the pessimism that administrations are desperately trying to get a handle on the situation. In the last few months, the services and manufacturing data from the major eurozone economies have broadly painted a picture of an economic recovery that is running out of steam. In light of the latest measures taken by governments in continental Europe, it is likely that economic activity will go down another gear.

Yesterday, the DAX 30 fell to a level last seen in June, but that was partially to do with the major sell-off in SAP. Keep in mind, the FTSE 100 hit its lowest level since May last week. The US markets finished in the red too, and the S&P 500 dropped to a level last seen in early October. Lately, the talks between Nancy Pelosi, the House Speaker and Steven Mnuchin, Treasury Secretary, have been in focus as they have been discussing the proposed coronavirus stimulus package. It is understood that Senate Republicans are not content with the size of the schemes they are discussing, so it seems unlikely that anything will be achieved before the presidential election.   

Equity markets in the Far East are mixed. The Hang Seng is the worst performer, but keep in mind it was closed yesterday, so it seems that it is playing catch up with the rest of the world. The Nikkei 225 is a little lower, while stocks in mainland China are fractionally higher. It reported that Chinese industrial profits increased by 10.1% last month, on an annual basis – which slowed from the 19.1% growth registered in August. Stock markets in Europe are tipped to recover slightly. 

At the beginning of the pandemic, central banks and governments threw colossal sums of money at the pandemic, and there isn’t much hope that there will be a repeat of that anytime soon – at least in Europe anyway. It is possible that US policymakers might agree on a package before the Presidential – which is one week away – but those prospects seem to be dwindling. If there is no chance of fiscal or monetary intervention, the mood in the markets will be determined by the health situation.   

Commodities fell sharply yesterday too as dealers took the view that if governments are tightening restrictions, there is probably going to be a drop off in demand. Industrial metals, such as copper, platinum, silver, and palladium all endured large losses. Oil was in a similar situation as demand concerns hurt the energy. It was also under pressure from excess supply fears, as Libya has recently upped its output as a ceasefire among the country’s factions has been called. WTI and Brent crude fell to three week lows.

As funds flowed out of stocks and commodities – assets that are deemed to be higher risk - money was directed into the US dollar, the Japanese yen, and to a lesser extent gold. In recent months, the greenback has become a common safe haven trade, and because gold is listed in US dollars, the upward move in the currency counteracts the increase in demand for gold.                  

At 12.30pm (UK time) the US durable goods report will be posted and the consensus estimate is 0.5%, which would be unchanged from August.

The US CaseSchiller house price index report is tipped to show 0.5% growth in August, and keep in mind the July reading was 0.6%. The update will be posted at 2pm (UK time).

The Conference Board consumer confidence reading for October is tipped to be 102, up from 101.8 in September. It will be revealed at 2pm (UK time).    

EUR/USD – has been moving higher since late September and while it holds above the 50-day moving average at 1.1797, the positive move should continue, and it might retest the 1.2000 area. A move below 1.1684, should put 1.1612 on the radar.  

GBP/USD – recently retreated from a six week higher and while it holds above the 100-day moving average at 1.2862, the uptrend should continue. 1.3269 might act as resistance, and a move beyond that mark, could put 1.3515 on the radar.     

EUR/GBP – while it holds above the 0.9000 mark, it might look to retest the 0.9157 area. A break below 0.9000 could see it target 0.8864.

USD/JPY – remains in the wider downtrend and if the negative move continues it could target 104.00. A rally might run into resistance at the 50-day moving average of 105.58 and a move above that, could see it target 107.00.                         

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