Stock markets appear to be starting to get a little wobbly as the latest earnings numbers suggest the global economy faces a challenging period in the months ahead.
For all the optimism about a new US stimulus programme, the rising hopes of a vaccine, and the likelihood of central banks keeping monetary policy extraordinarily loose, the resurgence of coronavirus cases that are starting to get reported across the world is prompting the realisation that hopes of a V-shaped recovery is starting to look like pie in the sky.
A resurgence of Covid-19 cases in Xinjiang in China, Hong Kong, and Australia, as well as spikes in Spain and Belgium, along with other localised outbreaks across Europe has prompted concerns about a second wave, and thus jeopardising further lockdown relaxation measures as we head into August.
US stocks finished the day lower last night, led by weakness in the tech sector, while markets in Europe had a rather more mixed session. As a result of the late slide in US markets, we look set to see a similarly weak start here in Europe, as we get set for the beginning of an earnings bonanza over the next three days, starting with Barclays and the UK banking sector today, followed by the tech titans of Apple, Amazon, Alphabet and Facebook later this week.
It is against this backdrop that today’s latest Fed meeting is set to take place with no changes in policy expected, however the virus outlook looks a lot different at this meeting than when the FOMC last met. At the time lockdown measures were being eased and the latest US jobs report, along with other data looked promising. Today the picture looks a lot different, with the Fed extending its emergency lending programs until the end of the year yesterday, in a sign that they are extremely concerned about how the US economy is doing. In further signs of trouble US consumer confidence also fell sharply in July to 92.6 from 98.3 in June.
The FOMC is also likely to have concerns that the recent recovery seen in the US economy may well be starting to falter in the face of a surge in coronavirus cases, not only across the sunbelt states of the US, but across the country more broadly. We’ve already heard mutterings around a concern that a lack of inflation, as well as widespread business defaults, could hamper any economic rebound in the weeks and months ahead. The most recent Fed minutes appeared to suggest that the FOMC was particularly concerned about this, and that Fed officials were leaning in a direction that suggested they were likely to be much more focussed on the employment component of their mandate, and letting inflation run hot before even considering a tightening of monetary policy.
A willingness to be more relaxed about its long-term goals regarding its inflation guidance could be the type of monetary policy change which would send an even stronger signal that rates were likely to remain lower for longer, especially since politicians in Washington continue to bicker about the size of any next stimulus package.
It’s also set to be a big day for the tech giants of Amazon, Alphabet, Apple and Facebook as they collectively get set to testify before the US Congress, where they are likely to face some tough and sometimes awkward questions about their market power. Apple especially is likely to face questions about how it can justify taking 30% in fees from third-party developers just for a place in its App store.
The pound has had a decent start to the week this week, however todays latest mortgage approvals and consumer credit data might paint a more cautious picture of the UK economy. Consumer credit is expected to see another net repayment figure, this time of £1.65bn, while mortgage approvals are expected to rise modestly from 9.27k to 33.9k in June.
EURUSD – has slipped back from the 1.1780 area, however the target remains the 1.1825 level, and 61.8% retracement of the 1.2555/1.0635 down move. The euro needs to hold above the 1.1590 level and 50% level for this to unfold.
GBPUSD – finding decent momentum above the 1.2770 area, and looks good to see a move towards 1.3020. Only a move back below the 1.2770 area undermines this scenario, however we are starting to look a little overbought. The 1.2820 level also offers decent support.
EURGBP – feels lithe failure above the 0.9140 area has seen the euro slip back, which suggests we may well have seen a short-term top. A move through the 0.9000 level is needed to confirm such a scenario and open up a return the 0.8920 area,
USDJPY – has continued to fall as it looks to close in on the 104.50 area. A move below 104.50 opens up the March lows. We now have resistance at the 105.70 area and behind that at 106.50.