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European markets poised to rebound

European markets poised to rebound

Eurozone equity markets finished on a low note on Friday because of the jump in the number of fresh Covid-19 cases.

France registered a record number of new coronavirus cases on Thursday and the reading for Friday was only a touch lower. Near the end of last week, The Netherlands also reported a record number of new cases. Spain is struggling with the health crisis too and there was speculation that Madrid would be put into a localised lockdown – which didn’t come into effect, but nonetheless the health crisis is serious. On Friday the DAX 30 and the CAC 40 fell to their lowest levels since early August and late May respectively.

The FTSE 100 and the FTSE 250 by contrast finished higher on Friday, but it is worth noting the British indices underperformed on Thursday – when the Winter Economy Plan was revealed. The UK’s Chancellor of the Exchequer, Rishi Sunak, revealed measures to assist the economy. The focus of the announcement was the post furlough scheme. Companies will be encouraged to keep on furloughed staff as the government will pay a portion of their wages but Mr Sunak made it clear that not every job will be saved.

Stock markets in the US rallied on Friday. It was reported that the Democrats were preparing to put forward a $2.4 trillion coronavirus relief package. The political stalemate between the Republicans and the Democrats has been going on for two months approximately. The sum being discussed will probably be considered too high by the Republicans, but the fact the smaller proposal is being made by the other side points to a move in the right direction in terms of negotiations. The US tech sector has been in focus recently as it has often influenced overall sentiment in the US and Europe. On Friday, the NASDAQ 100 and the S&P 500 closed up 2.3% and 1.6% respectively. The big names of the tech sector, like Netflix, Amazon, Facebook, Apple and Alphabet all gained in excess of 2%. 

Stocks in Asia are higher. At the weekend it was reported that industrial profits in China increased by 19.1% in August, which was slightly lower than the 19.6% growth posted in July. The latest reading was the fourth consecutive month of growth. The relationship between the US and China is likely to be put under further strain as Washington DC have imposed tougher export restrictions on the Hong Kong-listed company SMIC.

It was reported in the New York Times that President Trump only paid $750 in Federal Taxes in 2016. It is also believed that Mr Trump has personal debt of over $400 million, which is due to be repaid in the new few years. The report is not a good look for the US leader, but then again he fended off a lot of negative stories to win the US presidential election four years ago.

EU-UK trade talks will resume tomorrow. The latest discussions have been relatively positive according to David Frost, the UK’s chief negotiator. It is understood that Prime Minister Johnson wants to strike a deal, but not at any cost, so the discussions are likely to go down to the wire.        

The latest US durable goods data was underwhelming. The headline August reading was 0.4%, which undershot the 1.5% that economists were expecting. July’s reading was revised up to 11.7% from 11.4%, but the sharp drop in August could suggest that demand is tapering off. The report that strips out transport also showed 0.4%, but that was a fall from the 3.2% posted in the previous month. It is possible the drop off of demand is because the additional $600 per week in unemployment benefitted stopped. If that is the case, it is all the more reason for politicians to reach a deal in relation to the pandemic stimulus package.         

Lately the US dollar has attracted safe-haven funds and that pushed it up to the highest level since July. At the start of the month the greenback fell to its lowest level in over two years, but it has made a decent recovery in the last few weeks. The risk-off mood in the markets has helped the dollar, but so has the weakness in the euro and sterling. Philip Lane, the European Central Bank’s (ECB) chief economist, recently said that having negative interest rates could pave the way for a positive rate in the medium-term. The Bank of England’s (BoE) Andrew Bailey said that negative interest rates should be kept as a possibility. Over the weekend, it was reported the BoE has seen encouraging evidence in favour of negative rates, so this is likely to hang over sterling.

Gold and silver came under pressure on account of the rise in the dollar – the inverse relationship between the currency and the assets has been strong lately. Both commodities dropped to levels last seen in July. Concerns about rising Covid-19 cases impacted metals as traders are fearful that demand will fall. Silver has more industrial uses than gold and that’s why it underperformed the yellow metal last week.

Demand worries also weighed on oil too last week. The four-week average for US gasoline demand is down 9% on the year. In India, the throughput level at refineries last month was down 26% on an annual basis. Libya is getting back on its feet in terms of oil production so that was a factor too.

Christine Lagarde, the head of the ECB, will be speaking at 2.45pm (UK time).           

EUR/USD – has been moving lower since early September and while it holds below the 50-day moving average at 1.1785, the bearish move should continue, and it might find support at 1.1479, 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 1.3018, 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 105.88, the broader bearish move is likely to remain intact. 104.00 might act as support. A break above 105.88, could see it target 106.68, the 100-day moving average.  

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