European and US stocks posted decent gains yesterday.
Sentiment was lifted because of hopes of a US stimulus package being agreed upon, even though no major progress has been made on that front. Nancy Pelosi, of the Democrats, said there are still ‘serious differences’ between what both sides are requesting. It would appear that traders welcomed the talk between Pelosi and Steven Mnuchin, US Treasury Secretary, even though they didn’t amount to anything – a conversation is at least a step in the right direction.
The topic of the relief fund has been doing the rounds for weeks now. Originally, the Democrats were calling for a $3 trillion package, and they later said they would settle for a $2.2 trillion scheme. On the other side of the divide, the Republicans said they would be willing to go as high as $1.3 trillion deal. A gulf clearly remains, but the US non-farm payrolls report on Friday might put pressure on lawmakers, should there be a weak reading.
Continued optimism in relation to pharma companies developing a potential Covid-19 vaccine was also a factor in the rally witnessed on both sides of the Atlantic. US stocks drove higher as the S&P 500 and the NASDAQ 100 posted record closes again.
The Beige Book update yesterday pointed out the US economy expanded in August but there was some evidence that growth is slowing, which was blamed on the uncertainty surrounding the health crisis. Loretta Mester, president of the Cleveland Federal Reserve, said the recovery was fragile.
The ADP employment report massively undershot economists’ forecasts yesterday, but it didn’t hold-back US stocks or the dollar. Last month, 428,000 jobs were added, which was a big improvement on the 212,000 that were posted in July, but the forecast was 950,000. On Friday, the closely watched jobs report will be announced. In normal circumstances, there hasn’t been a very high correlation between the ADP report and the non-farm payrolls reading, and that relationship is even weaker now. The latest non-farm payrolls reading was 1.76 million, while the corresponding ADP number was 167,000, which was subsequently revised up to 212,000.
Overnight, the Caixin survey of Chinese manufacturing for August was posted, and it was 54, meeting expectations. The previous reading was 54.1. Stocks in mainland China are broadly unchanged, while they are a touch lower in Hong Kong. The Nikkei 225 has outperformed as it is up over 1%. A higher start is expected for European markets.
The dollar index had a bullish run yesterday as it built upon the gains that were racked up in the latter-half of Tuesday. Earlier in the week, it dropped to a level last seen over two years, but it has staged a rebound. In the past month, there have been a number of occasions when the greenback tried to snap out of its broader bearish trend, but so far it has failed to do so.
Silver, gold, platinum and palladium all lost ground yesterday as the metal’s inverse relationship with the dollar worked against them. The commodities enjoyed positive moves recently, so pullbacks were not a major surprise. Copper managed to hold up relatively well as it was largely flat on the day.
The oil market saw a lot of volatility yesterday. The EIA report showed that oil stockpiles fell by 9.3 million barrels, while the consensus estimate was for a decline of 1.88 million barrels. Gasoline inventories fell by 4.32 million barrels, which was also a larger-than-expected decline. It is believed the disruption to the energy market on account of last week’s tropical storm impacted the energy stockpiles. There were concerns about gasoline demand, and that weighed WTI and Brent crude.
The major economies of Europe will publish their latest services PMI reports between 8.15am (UK time) and 9.30am (UK time). Spain, Italy, France, Germany and the UK will publish their reports, and economists are expecting 48, 49.2, 51.9, 50.8 and 60.1 respectively.
The eurozone retail sales report for July will be released at 10am (UK time). The forecast is 1.5%, which would be a drop from the 5.7% posted in June.
US jobless claims are expected to be 950,000, while the previous report was 1 million. The continued claims report is expected to fall to 14 million from 14.53 million The readings will be announced at 1.30pm (UK time).
The US services PMI report and the ISM non-manufacturing update are anticipated to be 54.8 and 57 respectively, and they will be published at 2.45pm (UK time) and 3pm (UK time).
Andrew Bailey, the head of the Bank of England, will deliver a speech at 3pm (UK time).
EUR/USD – has been in an uptrend since April and if the bullish run continues it should target 1.2000 or 1.2140. A pullback might find support at 1.1696 or at the 1.1600 zone.
GBP/USD – while it holds above the 1.3000 mark, the bullish trend that has been in place since late June should continue, and it might target 1.3515. A move back below 1.3000, could see it target the 1.2800 zone.
EUR/GBP – since late July it has been pushing lower and a break below 0.8864 should put 0.8800 on the radar. A rally might run into resistance at 0.9025, the 50-day moving average.
USD/JPY – while it holds below the 100-day moving average at 106.94, the broader bearish move is likely to remain intact. A move through 105.10 could see it target 104.18. A break above 107.00, should bring 107.93, the 200-day moving average, into sight.