The European Central Bank (ECB) update was the highlight of yesterday’s session.
The refinancing rate and the deposit rate were kept on hold at 0.00% and -0.5% respectively, meeting forecasts. Christine Lagarde, the head of the ECB, hinted that more stimulus will be announced at the December meeting. The central banker said that all tools available will be considered when it comes to potentially changing monetary policy but traders took the view that the pandemic emergency purchase programme (PEPP), which already stands at €1.35 billion, will be increased.
Lagarde said that downside risks increased recently and that the economic reports for the fourth quarter have softened. Stock markets in Europe were in the red before the update from the ECB, but after Lagarde announced that there is ‘little doubt’ that the central bank will act in December, and equities were given a lift. By the close of play, the FTSE 100 finished in positive territory but the major markets in the eurozone ended slightly in the red.
This week there has been turmoil in European stock markets on account of the jump in the number of new Covid-19 cases and the rise in the hospitalisation rates. The real damage to market sentiment was on the back of the stricter restriction in countries like Spain, Italy, France and Germany. Broadly speaking, the eurozone’s economic rebound was cooling – the manufacturing and services reports have disappointed. Traders are wondering, what the currency area will look like in early December, when France’s and Germany’s lockdown should be over. The optimism of the summer has been replaced by a sense that it is going to be long winter.
It is fair to say that the US economy is rebounding nicely. According to the advance GDP reading, the economy expanded by 33.1% in the third quarter, and keep in mind that it contracted by 31.4% in the second quarter. It underwent a 5% contraction in the first quarter. As good as the third quarter reading was, economic output is still down about 15% from the pre-crisis level. The $600 per week unemployment payments were halted in late July, so that is likely to be a factor in the inevitable economic cooling in the fourth quarter.
The US labour market continues to slowly improve. The jobless claims reading fell from 791,000 to 751,000, and the continuing claims reading dropped to 7.75 million down from 8.46 million – they were the lowest readings since March.
US equity markets closed higher last night as the fear surrounding the health crisis faded. The NASDAQ 100 and the S&P finished up 1.8% and 1.19% respectively. After the close of cash trading in New York, Alphabet, Amazon, Apple and Facebook all posted their latest quarterly results, and the tech giants exceeded EPS and revenue forecasts. There were some pockets of weakness in the earnings updates, and US index futures pushed lower not long after the earnings were posted.
The bearish sentiment spilled over to Asia and European indices are on track to open lower.
Even though US stocks rallied last night, so did the US dollar, despite the fact that the dollar has been a popular safe haven play recently. The suggestion that the ECB will go down the route of more easing hurt the euro. Lately, the Bank of England, has been talking about the possibility of negative interest rates. In light of the latest US GDP reading, it seems the Fed is unlikely to loosen monetary policy in the near-term, which is probably why the dollar is in demand.
The fears surrounding the health crisis weighed on commodities. WTI and Brent crude lost over 2%, as did platinum and palladium, and silver lost a little ground too.
Traders will be keeping an eye on the growth reports. The French GDP report for the third quarter will be posted at 6.30am (UK time) and on a quarterly basis, economists are expecting 15.4%, and that would be a big rebound from the -13.8% registered in the second quarter. German GDP is tipped to swing from -9.7% in the second quarter to 7.3% in the third quarter. The report will be revealed at 9am (UK time). Looking at the eurozone as a whole, the growth for the third quarter is tipped to be 9.4%, and keep in mind the bloc incurred an 11.8% contraction in the previous quarter. Eurozone CPI is expected to hold steady at -0.3%, and the unemployment rate is predicted to rise from 8.1% to 8.3%. The eurozone reports will be revealed at 10am (UK time).
At 7am (UK time) the UK nationwide HPI report for October will be announced and economists are predicting growth of 0.4%, and that would be a drop from the 0.9% registered in September.
The Federal Reserves’ preferred measure of inflation is the core PCE report, and that will be posted at 12.30pm (UK time). Economists are predicting the rate will rise from 1.6% to 1.7%. The personal income metric is tipped to rebound from -2.7% in 0.4% in September, while the personal consumption level is anticipated to hold steady at 1%.
The Canadian GDP report for August is predicted to be 0.9%, and that would be a large fall from the 3% posted in July. The report will be announced at 12.30pm (UK time).
The final reading of the University of Michigan consumer sentiment reading is expected to remain at 81.2, and it will be revealed at 2pm (UK time).
EUR/USD – has been moving lower for over one week and if the bearish move continues it could target 1.1612 or 1.1400. A rebound might run into resistance at 1.1788, the 50-day moving average or at 1.2000.
GBP/USD – recently retreated from a six week higher and while it holds above the 100-day moving average at 1.2870, the uptrend should continue. 1.3269 might act as resistance, and a move beyond that mark, could put 1.3515 on the radar.
EUR/GBP – while it holds above the 0.9000 mark, it might look to retest the 0.9157 area. A break below 0.9000 could see it target 0.8864.
USD/JPY – remains in the wider downtrend and if the negative move continues it could target 104.00 or 101.19. A rally might run into resistance at the 50-day moving average of 105.50 and a move above that, could see it target 107.00.