It was a relatively uneventful day yesterday, hence volatility was low in stocks.
The major equity markets in Europe largely closed higher, but gains were fairly small. US indices moved higher too but, like their European counterparts, the gains were modest.
Traders were paying close attention to US politics as Republicans and Democrats were still negotiating the terms of the coronavirus relief package. The political wrangling has been going on for over one week, but dealers are still a little optimistic than an agreement will be reached. Nancy Pelosi, the Speaker of the House of the Representatives, said she does not expect an agreement to be achieved this week. It was reported that talks have been productive, so that has been keeping the bulls engaged.
The US-China relationship has been deteriorating for a while. Beijing has been encroaching on Hong Kong’s autonomous status and that has attracted the anger of the US government amongst others. The latest development on the US-China front has been the decision by President Trump to ban TikTok – the video sharing app - that is owned by ByteDance from China. The Donald is concerned about national security, and that is the motivation behind the move. Microsoft has held talks to acquire TikTok’s US unit, and President Trump said he would only approve the deal if Microsoft pays a cut of the acquisition price to the US Treasury. The banning of the social media group from the US is one thing, but the request for a cut of the deal is likely to have compounded the resentment felt by the Chinese authorities.
The dollar index saw a fair bit of volatility yesterday. For most of the session it was continuing in the positive move it began on Friday, but then turned lower, and it finished the session in the red. At the end of last week it traded at a 2-year low and then it rebounded. It moved higher on Monday, but it closed below the highs of the session so there were some questions about the strength of the turnaround. The fact it ended in the red yesterday suggests that sentiment is still weak.
The slide in the greenback helped gold trade above $2,000 for the first time. Silver was boosted too and it nearly retested the July high – which was the highest in over six years. Gold, and to a lesser extent silver, have been in higher demand recently as weakness in the dollar made them relatively cheaper to buy. The aggressive easing policies of central banks around the globe have put big pressure on bond yields, some of which turned negative. This has been a factor in the metals’ popularity as some investors are turning to gold and silver.
Overnight, the Caixin survey of Chinese services was posted, and the reading was 54.1. Economists were expecting 58, and keep in mind the June report was 58.4. Equity markets in the Far East are mixed and volatility is low.
It was reported that US trade representative, Robert Lighthizer, will meet with Lui He, China’s vice president to discuss the implementation of phase one of the trade deal. China has not lived up to its commitments in terms of purchasing US goods, but the pandemic has been a major factor. Should the meeting go ahead, other issues, such as the TikTok situation might be discussed.
Yesterday was a quiet day in terms of economic data. The eurozone PPI reading improved from -5% in May to -3.7% in June. The increase in the reading points to higher demand in the currency bloc, but it is likely that higher commodity prices impacted the reading too. PPI can often be a leading indicator for CPI. If prices rise at the factory level, then prices will probably increase for consumers too. US factory orders for June were 6.2%, which topped the 5% that economists were expecting. The previous reading was revised from 8% to 7.7%. A certain level of cooling off can be expected but the growth level will help with the rebound.
The major economies of Europe will publish their services PMI reports between 8.15am (UK time) and 9.30am (UK time). Spain, Italy, France, Germany and the UK will release their updates, and economists are expecting 52, 51, 57.8, 56.7 and 56.6 respectively. Earlier in the week, the manufacturing PMI figures were posted and they all showed growth on the month, and most topped the consensus estimates.
Eurozone retail sales will be published at 10am (UK time) and the June reading is tipped to be 5.5%, and that would be a big drop off from the 17.8% registered in May.
The US ADP employment is expected to show to 1.5 million jobs were added last month, and that would be a drop off from the 2.36 million that was posted in June. The report will be posted at 1.30pm (UK time).
The US services PMI reading and ISM non-manufacturing are expected to be 49.6 and 55 respectively. The updates will be posted at 2.45pm (UK time) and 3pm (UK time).
Oil will be in focus today as the EIA report will be released at 3.30pm (UK time). US oil stockpiles are anticipated to fall by 3.4 million barrels.
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 on Friday 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 0.8935, 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 107.09. A break below 104.00 should put it on the road to 102.00