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Europe broadly called higher, RBA kept rates on hold

Stock markets on both sides of the Atlantic enjoyed gains yesterday as bullish sentiment dominated. 

The FTSE 100 rallied over 2% to close above 6,000. The DAX 30, CAC 40 and the FTSE MIB rose by 2.7%, 1.9% and 1.5% respectively. Dealers in Europe and the US were hopeful that a deal would be struck in regards to the US $1 trillion stimulus package, even though there weren’t any positive sounds coming from Washington DC. Republicans and Democrats are still fighting over the details of the stimulus programme, but traders feel that some sort of compromise will be worked out in the end. Politicians have to be seen to put up a fight, but it wouldn’t go down well with their respective voters if the negotiations came to nothing.

The US-China relationship hasn’t been great recently. Tensions have been brewing in relation to Hong Kong as the Chinese government have eroded some of the region’s autonomy. Many countries feel the authorities in Beijing are infringing on the principle of ‘one nation, two systems’. It is understood the Trump administration will crack down on an ‘array’ of software companies that are controlled by the Chinese government. President Trump has an election to contest in November, and he needs a bogeyman to blame, so it looks like China will be used as a political punching bag. The ruling party in China have been reasonably restrained in terms of retaliating, but that might change as the election draws nearer. Mr Trump dropped his opposition to Microsoft acquiring TikTok, the Chinese-owned video-sharing app, but he said the US Treasury would want a cut of the deal. 

The Reserve Bank of Australia (RBA) kept rates on hold at the record low of 0.25%, meeting expectations. The RBA repeated the point that it would do what it takes to support the economy. Australian retail sales in June jumped by 2.7%, topping the 2.4% forecast. It is clear that demand remains robust. Equities in Australia, Japan and Hong Kong are showing strong gains, while stocks in mainland China are a touch higher.   

The global economy continues to rebound, and that was evident in the manufacturing reports from various different major economies yesterday. China, Spain, Italy, France, Germany, the UK and the US all registered manufacturing data that showed growth between June and July. The vast majority of the readings topped economists’ forecasts too. Governments have been reopening their economies and it is clear that thing are improving. It is worth noting that several of the nations mentioned above have paused the loosening of restrictions because of health concerns, so it is possible that future manufacturing levels might stall.              

Oil pushed higher yesterday amid the broader optimistic mood in the markets. The energy is closely connected to heavy industry so the continued rebound in manufacturing feeds into the positive narrative. In May, OPEC+ cut output by a record 9.7 million barrels per day (bpd) in an effort to stop the price from falling through the floor. The steep production cut was eased to a 7.7 million bpd cut at the beginning of this month to reflect the increased demand as economic activity ticked up.  

The US dollar index built on the gains that were posted on Friday. In recent weeks, the greenback has been under pressure and at the end of last week it tumbled to a fresh 26-month low, but then it enjoyed a snap-back. Yesterday, it moved higher and hit a one-week high, although it closed well below the session highs. The positive move in the greenback weighed on the euro, the pound, the Australian dollar, and the yen.

Metals had mixed fortunes yesterday as the more industrial ones, copper, platinum, and palladium posted gains. On the other hand, gold and silver ended slightly in the red. Gold managed to rack up yet another record high before turning lower. 

At 10am (UK time) the eurozone PPI reading will be posted and economists are expecting a reading of -3.9%, and that would be an increase on the -5% registered in May. PPI is usually seen as a front runner for CPI, because if prices at the factory levels increase, then that will probably ripple out into consumer prices.

US factory orders for June are tipped to be 5%, and that would be a drop-off from the 8% that was registered in May. The report will be posted at 3pm (UK time).      

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 0.8940, 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 107.17. A break below 104.00 should put it on the road to 102.00

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