Last week promised so much in terms of the agreement among EU leaders of a fiscal plan for a pandemic recovery fund, which initially helped send European stocks to their best levels in five months.

As with most things concerning the EU however, talk is cheap, and the reality remains that any money is still likely to take months to arrive, and in essence what happened was that the agreement turned out to be a classic case of a sell the news moment.

This, along with a deterioration in Sino, US relations, as well as an ever rising Covid-19 death and infection rate in the US, prompted concerns that the recent rebound in the US economy is in danger of stalling, sending stock markets tumbling sharply towards the end of the week.

As we start the new trading week equity markets in Asia have undergone a somewhat mixed start to the week, with reports of fresh Covid-19 outbreaks across Asia, with markets here in Europe set for a mildly positive start, as investors mull the prospect of another US stimulus program to replace the one that is set to expire at the end of this week. A $1trn package has been mentioned with US lawmakers set to pick over the details this week.

We have also seen the US dollar tumble, hitting its lowest level since September 2018, over these very same US economic concerns. US weekly jobless claims posted their first week on week increase since March, raising concerns that this could well continue with the numbers this week. The slide in the greenback has continued in Asia trading as we start a new week with safe haven currencies notable gainers.

These safe haven currencies, notably the Swiss franc, has seen the franc hit a five year high against the dollar, exceeding the levels we saw when stock markets were nearing the bottom of their end of February tumble.

We have also seen the gold prices hit a new record high in Asia this morning, moving beyond the previous record of $1,921 an ounce.

One thing we did learn last week was that the rebound in economic activity in France, Germany and the UK has continued apace through June and July, with improvements in both manufacturing and services sector activity, which offers hope that these economies could well outperform the US economy, in the weeks and months ahead, second virus spikes notwithstanding.  

The dangers of just such a scenario have been highlighted over the weekend with the UK quarantine restrictions imposed on flights from Spain, after some significant Covid-19 spikes in the Catalonia and surrounding regions, which could see travel stocks take a hit when European trading opens later this morning. Concerns about a second wave are particularly notable given this morning’s news from Ryanair as they announced a Q1 loss of €185.1m.

The slide in US stocks last week, particularly the Nasdaq, which declined for the second week in succession, has raised concerns about elevated valuations, ahead of what is set for another big week for markets in the US, as well as here in Europe.

Later this week we’ll get the latest meeting from the Federal Reserve, and find out how concerned the FOMC is about the recent soft patch in the US economy, the rise in the infection rate inside, as well as outside the US, and the prospect that the economic recovery could well be delayed due to the recent reimposition of localised lockdowns across a number of states, and its effect on the US labour market.

We also have the latest Q2 numbers from UK banks later this week, where in light of US banks setting aside much larger provisions for non-performing loans, than they did in Q1, we’ll probably see a similar theme here when Lloyds, Barclays and Nat West Group report.

Today we have the latest German IFO business survey for July, which should show an improvement on the numbers we saw in June. One notable thing about the recovery in the latest Germany data has been that it has lagged behind the data in France and the UK, which might suggest a touch more caution amongst German business, about current recovery prospects.    

EURUSD – has moved through the 1.1600 level and 50% retracement of the 1.2555/1.0635 down move. This now opens up the prospect of a move towards 1.1825, the 61.8% retracement level. Support now comes in at the 1.1570 area, which needs to hold for further gains to take place.

GBPUSD – has moved through the 61.8% Fibonacci retracement of the 1.3600/1.1412 down move at 1.2770, as well as the June highs 1.2815, opening up the prospect of a move towards 1.3020. Support comes in at the 1.2500 level and the lows from 15th July.

EURGBP – feels like it wants to go higher, but still capped at the 0.9135 level however the dips are getting shallower. A move through 0.9140 targets 0.9180. Support remains back at the lows this week at the 0.9000 area, just above the 50-day MA at 0.8980.

USDJPY – has slipped below the 106.50 area, and could be set up for a move towards the 104.50 area initially. We now have resistance at 106.50, as well as the 107.50 area.

 


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