While US markets managed to close at new record highs last week, it was notable that markets in Europe struggled for any sort of traction at all, largely closing the week lower over concern about a stalling in the economic recovery, after services PMIs from France and Germany fell back sharply in August.
The larger than expected slowdowns in these latest economic indicators appears to have knocked confidence in the prospect of a V-shaped and sustained rebound in economic activity across the region, which combined with a rise in infection rates, and the implementation of quarantine measures undermining the momentum that had seen August get off to such a solid start for European stocks.
With a lot of investors worried about how expensive US stocks already are, and political tensions in the lead up to US elections, there is a concern that US markets could be vulnerable to a sharp snapback. This has led to increasing optimism about European stocks, and the prospect of a decent rally in a region that still looks cheap relative to the US.
While this is a compelling narrative, it also underplays the political risks around a region where fiscal responses have been patchy at best, and for all the talk and optimism of the €750bn European pandemic recovery fund, the delivery of this extra money still remains months away, which leaves the European Central Bank as the only game in town.
As such today’s European open looks set to be a modestly positive one with markets in Asia trading modestly higher in a week that is relatively light on data, but where investors will be looking anxiously for further evidence that the rise in virus cases, that is taking place across the globe, is starting to affect the various recoveries from differing stages of lockdown.
This week the main focus, apart from the latest Q2 GDP iterations from the US, Germany and France, is this week’s virtual central bank symposium which will take the place of the annual Jackson Hole event, where the topic will be “Navigating the Decade Ahead: Implications for Monetary Policy” on August 27th and 28th, Investors will be looking for clues as to what steps the Federal Reserve might look to take in the event of another serious flare up in covid-19 cases as we head into the autumn, with the added complication of a Presidential election in early November.
The disagreements over further fiscal support for the US economy are also likely to come into sharp focus after last week’s sharp rise in weekly jobless claims, which saw the total number of claims rise sharply back above the 1m level.
With the Republican party set to focus on their own national convention this week, following on from the Democrat convention last week, pressure is building on Democrat House Speaker Nancy Pelosi to come to an accommodation with Republicans on a new plan, which will help US states fund shortfalls in their budgets caused by the pandemic.
The slide in the US dollar over the course of the last few weeks appears to be showing signs of forming a possible base, against a backdrop of concerns that it could fall even further over concerns that the fractious nature of US politics, is likely to hobble the US administration’s response to what appears to be a slowdown in the pace of the US recovery.
The US dollar’s safe haven status has also been called in to question against a backdrop of sliding bond yields, as interest rate differentials take the shine off the greenbacks allure. While all of these concerns are valid, the alternatives are no less appealing, despite the euro’s recent rise.
For all of the US dollars faults, and there are many, it still remains the safest bet out there, particularly when you consider the alternative, the euro, which remains a flawed currency, subject to political risks all of its own.
EURUSD – last week’s failure to push up above 1.1950, has seen the euro slip back, with the result we could be seeing the potential for building up a topping pattern, with a neckline near the 1.1700 area. We need to push down through the 1.1720 to complete a move towards the 1.1680, and then 1.1500. The 1.1920 area remains a key resistance.
GBPUSD – despite a brief push above the 1.3200 area to 1.3270, the pound has struggled to push higher. Support remains just above the 1.3000 area. A break below 1.2980 opens up the prospect of a move towards the 1.2770 area. We also have minor resistance at 1.3130.
EURGBP – appears range bound having rebounded from the 100-day MA at the 0.8940/50 area, it does appear that the next move could be towards the 0.8870 area, on a break below 0.8920. The euro needs to break above the 0.9080 level to retarget the 0.9130 level.
USDJPY – failed at the 107.20 area earlier this month has seen the US dollar slide back, with support down near the 104.20 area.
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