The bullish move that was seen at the start of the week was triggered by an editorial in the China Securities Journal. The article talked about the possibility of a bullish run in Chinese equities, and in turn there was a surge in domestic stocks, and that paved the way for the upward move in world stock markets on Monday.
One could argue the rally was essentially manufactured by the article in question, hence why the feel good factor didn’t last too long. By the close of play yesterday, the FTSE 100, DAX 30 and the CAC 40 had handed back nearly all the gains that were made on Monday. Yesterday’s move was more about a correction rather than a sharp change in outlook.
US indices got off to a less volatile start yesterday. The tech sector continued to be popular and it helped the S&P 500 turn positive in early trading. Stocks such as Apple, Facebook, Amazon and Netflix all posted record highs, and in turn the NASDAQ 100 set a new all-time high. The bullish move ran out of steam and the S&P 500 and the NASDAQ 100 closed down 1.08% and 0.75% respectively. Raphael Bostic, the head of the Atlanta Federal Reserve Bank cautioned the rebound in the US economy might be levelling off.
Equity markets in Asia are mixed as stocks in China and Hong Kong are showing modest gains, while the Nikkei 225 is in the red. The WHO said it wouldn’t be surprised if the death rate started to rise as Covid-19 cases increased in June.
Rishi Sunak, the Chancellor of the Exchequer, will be in focus today as his is tipped to unveil various schemes that are aimed at aiding the economy. Some of the programmes have already been announced. Last week, Prime Minister Johnson, revealed a £5 billion infrastructure plan.
There is talk about more funds being allocated to schools too. It is believed that £3 billion will be earmarked for a green investment package – which will include energy efficiency schemes and the creation of jobs. The house building sector could be in for a boost as there is talk the stamp duty threshold will be raised from £125,000 to £500,000. Changes might be introduced to the furlough scheme and VAT might be alerted too.
The European Commission (EC) downgraded its outlook for the EU and the eurozone. The group revised its forecasts because its felt European countries reopened their economies at a slower rate than initially predicted. The EC is now forecasting the EU and the currency area will contract by 8.3% and 8.7% respectively in 2020, while the previous forecasts were -7.4% and -7.7%.
The scale of the revision isn’t huge, but a negative revision is important from a psychological point of view. The news from the EC echoed that of the IMF, who in June predicted the global economy would shrink by 4.9% this year, while their previous prediction was -3%. The IMF are very bearish on the eurozone as they feel it will contract by 10.2% in 2020.
The CMC GBP index rallied yesterday as the UK’s and the EU’s chief negotiators had dinner at Downing Street. Britain’s David Frost entertained Michel Barnier and no doubt the conversation included topics such as trade and fishing rights. Sterling pushed higher during the day as dealers took the view that some progress should be made. The UK and the EU have both expressed a desire to strike a deal, but differences remain.
At 3.30pm (UK time) the EIA report will be posted and US oil stockpiles are tipped to fall by 3.2 million barrels, while gasoline inventories are anticipated to remain unchanged.
EUR/USD – since early May it has been in an uptrend, but it has been trading sideways recently. If it holds above the 1.1168 zone, it could target 1.1495. A break below the 1.1168 area might pave the way for 1.1042, the 200 day moving average, to be targeted.
GBP/USD – since late June it has been in an uptrend, and should the positive move continue, it might target 1.2686, the 200-day moving average. A move through that level should put 1.2812 on the radar. A drop below 1.2251, might bring 1.2076 into play.
EUR/GBP – yesterday’s daily candle has the potential to be a bearish reversal, and if it moves lower it might find support at 0.8930, the 50-day moving average. A retaking of 0.9067 could see it target 0.9239.
USD/JPY – has been drifting lower for the last month and support could come into play at 106.00. A rebound might run into resistance at 108.38, the 200-day moving average.
FTSE 100 is expected to open 34 points lower at 6,155
DAX 30 is expected to open 46 points lower at 12,570
CAC 40 is expected to open 25 points lower at 5,018
By David Madden (Market Analyst at CMC Markets UK)