US stocks had a stellar session last night as the US and Mexico reached a new trade deal.
The announcement of the agreement, sent the S&P 500 and the NASDAQ composite to all-time highs, and the Dow Jones closed above 26,000 for the first time since early February. It was a broad based rally whereby manufacturing, materials and tech stocks soared. The trade deal needs to be approved by Congress, but investors are clearly confident of it getting approved. Trade tensions have been hanging over equity markets, and this is certainly a step in the right direction. It is believed that Canada will be on the agenda next, and traders will be paying close attention to those developments.
In keeping with the trade theme, traders are still mindful that the US-China talks last week didn’t achieve much. It would appear that the trade spat will rumble on and there is chatter in the markets that the US is eyeing up another round of tariffs on Chinese goods, but this time it could be up to $200 billion worth of Chinese imports. The US department of agriculture has plans to financially support farmers who have been targeted by Beijing’s tariffs, and this initiative suggests how determined Washington DC is to maintain a hard-line.
The US dollar has been hit by the comments from Federal Reserve boss Jerome Powell. Mr Powell was one of many central bankers to deliver an update at the Jackson Hole Symposium. Earlier this month, the greenback it its highest level in over a year, but traders cut their long positions after the Fed chief issued a positive outlook for the US economy, but it wasn’t as hawkish as some traders had hoped. Mr Powell essentially said the US economy is performing well and further rate hikes are likely, but even though growth and inflation are solid, they are not going to be storming ahead. Dealers used his update as an excuse to dump the dollar. Traders are widely expecting a rate hike from the US central bank next month and some are also expecting another hike in December too. Overnight, the People’s Bank of China increased the daily guidance for the yuan in a bid to stabilise the currency, but it actually triggered US dollar buying.
The slide in the US dollar has lifted gold, yesterday the metal hit its highest level since the middle of August. In recent months, there has been a strong inverse relationship between gold and the greenback, and we have yet to see any sign of that relationship breaking down. Earlier this month, the metal fell to its lowest level since January 2017, and bargain hunters have been swooping in recently due to the dip in the dollar, but the metal may find few buyers as the September Fed meeting draws nearer.
Sterling remains under pressure as the increased chatter of a 'no-deal Brexit' is hurting the currency. A report from the US Commodity Futures Trading Commission showed last week that bearish bets on the pound are growing, and according to Goldman Sachs, short positions are now at the highest level since mid-2017. The economic indicators from the UK have been respectable recently, but the political uncertainty surrounding Brexit is too great. Yesterday, President Macron said he wants to maintain a strong relationship with the UK, but he wants to preserve the integrity of the EU.
Yesterday, the DAX had a strong finish, and the increase in the German Ifo business climate survey helped investor sentiment. The reading came in at 103.8, while economists were expecting 101.9, and the July reading was 101.7. The August report was the highest since March, but it is worth noting the reading back then was 114.7.
At 2pm (UK time) the US Case Schiller house price index will be announced, and on an annual basis economists are expecting an increase of 6.5%. The Conference Board will reveal the consumer confidence report, and traders are anticipating a reading of 126.8, which would be slightly lower than July’s 127.4.
EUR/USD – has been bouncing back for nearly two weeks and it has pierced the trend line resistance from the June high – 1.1670 region, and if it can hold above that level, it might target 1.1850. Moves lower might find support at 1.1500.
GBP/USD – has been in a downtrend since April, and if the bearish move continues it could target 1.2590. Pullbacks might run into resistance in the 1.2957 to 1.3000 region.
EUR/GBP – has been pushing higher since April and if the bullish run continues it could target 0.9100. A move lower might find support at 0.9030 or 0.9000.
USD/JPY – the upward trend that began in March is still intact, and if the positive move continues it might target 112.15. Support might be found at 109.82 – the 200-day moving average.
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