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China data helps mood, Europe called higher, manufacturing reports in focus

China data helps mood, Europe called higher, manufacturing reports in focus

Stock markets were mixed on Friday. 

European equity benchmarks ended the session in the red as Covid-19 concerns and the lack of political progress in relation to the US $1 trillion stimulus package weighed on sentiment. On Friday, the WHO said in the past 24 hours there were nearly 300,000 new coronavirus cases reported – the largest daily increase on record.

The FTSE 100 was the worst performer of the major European indices as the firmer pound impacted the relatively internationally-focused index. The FTSE 100 fell by over 1.5%, while the FTSE 250, which is a better reflection of the British economy, dropped by 0.5%.

A few big tech stocks helped the S&P 500 gain over 0.7%. The NASDAQ 100, the tech-focused index, rallied over 1.7%. Apple and Facebook set all-time highs, while Amazon rallied too. The big names skewed the indices .The broader index, the Russell 2000, dropped almost 1%, which highlights the major influence of the big tech players.     

US-China tensions are likely to remain in focus as Mike Pompeo, the US Secretary of State, claimed the US government will clamp down on an ‘array’ of Chinese state-controlled software companies. It is believed the move is motivated by concerns about national security. President Trump said he will ban TikTok, the video sharing app, in the US. In the past few hours it was announced that Microsoft are in talks to acquire TikTok from ByteDance. Mr Trump might feel differently about the social media company if it is controlled by a US group.  

Lawmakers in the US have yet to reach an agreement with regards the $1 trillion stimulus package. Republicans and Democrats are reported to have made progress over the weekend, but a deal has yet to be finalised.

The economic impact of the pandemic on the eurozone economy was evident in the flash GDP report on Friday. The second-quarter reading, on a quarterly basis, was -12.1%, and that was a huge decline from the 3.6% fall that was registered in the first quarter. It was the region’s largest economic slump on record. However, countries in the currency bloc started to reopen their economies in the second quarter, and there is a general feeling we are over the worst of the downturn.

The eurozone also published its flash CPI readings on Friday. The headline CPI reading for July was 0.4%. That was an increase on the 0.3% registered in June. Keep in mind that economists were expecting the reading to slip to 0.2%. The core CPI reading jumped from 0.8% in June to 1.2% in July. The core metric is typically considered to be a better gauge of underlying demand. Since governments have loosened their restrictions, that has unleashed the pent-up demand was that brewing because of the imposed lockdowns.

Overnight, the Caixin survey of Chinese manufacturing was revealed. The reading was July was 52.8, while economists were expecting 51 3. The previous reading was 51.2. Stocks in the Far East are mixed, as equities in mainland China and Japan are showing decent gains, while the Hong Kong market is in the red. European indices are called higher.       

Demand in the US has cooled, but it is still robust. The personal spending reading in June was 5.6%. The May update was revised to 8.5% from 8.2%. On the other side of the coin, the personal income report came in at -1.1%, which was an improvement from the -4.4% reading in the previous month. In normal circumstances, a negative reading in the income update would be viewed as bad for an economy. It is most likely down to the fact that more people are re-entering the labour market, and in turn weighing on the average wages earned. The core PCE reading is the Fed’s preferred measure of inflation. The level dipped to 0.9% from 1%. It is a little concerning that demand is dwindling.

Last week we heard from the Federal Reserve. The US central bank kept rates on hold, meeting forecasts. The repo facility and the dollar swap lines were extended until the end of March 2021. Jerome Powell, the head of the Fed, reiterated the view the bank will do what it takes to support the economy. Mr Powell also said that loose fiscal policy was needed too – which was a plea for Republicans and Democrats to strike a compromise on reaching a deal in relation to the $1 trillion package. No deal was reached by the time markets closed on Friday.

The US dollar index fell to its lowest level in over two years on Friday, but it managed to rebound in the final few hours of trading. At the back end of last week, EUR/USD hit a two-year high and GBP/USD reached its highest level in over four months.

The recent weakness in the US dollar helped gold hit a record high. The softer greenback made the metal relatively cheaper to buy as it is quoted in dollars. The extremely loose monetary policies of central banks around the world have put major pressure on government bond yields - some yields are now negative, and that has also been a factor behind gold’s popularity.  

Between 8.15am (UK time) and 9.30am (UK time) several European economies will release their manufacturing PMI reports. Spain, Italy, France, Germany and the UK will publish their numbers, and economists are expecting 52, 51.2, 52, 50 and 53.6 respectively.

The US manufacturing PMI and the US ISM manufacturing reports are expected to be 51.3 and 53.6 respectively. The readings will be published at 2.45pm (UK time) and 3pm (UK time) respectively.            

EUR/USD – retreated a little from its highest level in over two years. If the bullish run continues it might target 1.2000 Support could come into play in the 1.1700 area, or the 1.1600 zones.

GBP/USD – hit its highest level in over four months and while it holds above the 1.3000 mark, the bullish trend should continue. 1.3200 might act as resistance. A move through 1.3000 might put the 1.2900 area on the radar.

EUR/GBP – has been moving lower in the past week and a break below 0.9000, might see it target 0.8940, the 100 day moving average. If it holds above 0.9000, it might retest 0.9175.  

USD/JPY – Friday’s candle has the potential to be a daily bullish reversal. If it moves higher from here, it might run into resistance at the 50 day moving average at 107.17. A break below 104.00 should put it on the road to 102.00. 


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