A Depression For The 21st Century

The Depression Of The 21st Century will likely end up being the new singular event of discussion and comparison for all financial and economic catastrophes. Questions of how much worse and how long it will last are difficult to answer. Predictions about the type and strength of potential recovery could be premature.

THE GREAT DEPRESSION

After the stock market crash in October 1929, the situation was bleak. Formerly wealthy investors literally lost everything. Unemployment surged, especially with the layoffs on Wall Street.

The onset of the new year, 1930, brought new-found optimism. Banks and brokerage firms began hiring again, confidence increased and stocks recovered a majority portion of their previous losses.

Unfortunately, things didn’t get better. The new-found optimism was lost, stocks collapsed again, and the layoffs continued. Over the next two years, stock prices declined by more than ninety percent.

What if something like that happened today? A similar percentage drop in the Dow Jones Industrial Average would take it from 29,000 to 2900. There is not much allowance for confidence to reassert itself in the face of stocks dropping to a level last seen in November 1991. A nearly 30-year period of higher and higher stock price gains would be wiped out in two short years.

Taking only two years to find a bottom might be the best news. It took the stock market (DJIA) twenty-three more years (twenty-five years in all) to regain its all-time price peak from August 1929. That is in nominal terms. In inflation-adjusted terms, the stock market did not regain and exceed its previous all-time high until May 1959 – thirty years after the crash.

As bad as the stock market numbers sound, other events and circumstances reflect a clearer picture of the financial and economic turmoil which followed the crash.

The ranks of unemployed grew to more than twenty-five percent, then declined to approximately twenty percent and remained at that level until dropping sharply with the concurrent rise in manufacturing and industrial activity associated with the United States involvement in World War II.

Homeless people on the streets, long lines at soup kitchens, beggars, and tent cities were obvious indications of the depressed state of the economy. Week after week, month after month, year after year, the Great Depression lingered on.

The conditions accompanying the bleak economic environment were exacerbated by bank failures. People who thought they had some money safely deposited at their local building and loan institution or commercial bank saw their hopes and dreams dashed. Bank failures became an almost common threat to financial stability.

How much more difficult would it be for us today to deal with similar events and circumstances? Probably much more difficult. We might not be able to cope with it.

As a society today, we are far removed in experience and memory from hard times. We have become accustomed to being taken care of. Part of that coddled feeling is due to the extreme level of government guarantees and our expectations that ‘Big Brother’ will always be there to do something.

Investors and consumers like guarantees; and they want to see evidence that a guarantee is more than just an empty promise.

During the 1930s, with the alarming numbers of bank failures and the Great Depression at its full-blown worst, confidence was almost nonexistent. Bank runs and depressed stock prices had created an atmosphere of financial panic.

President Roosevelt’s answer was a bank “holiday”. Not too long afterwards, Congressional legislation authorized the formation of the Federal Deposit Insurance Corporation (FDIC) and the Federal Savings And Loan Insurance Corporation (FSLIC).

Use of the terms ‘federal’ and ‘insurance’ in the names of the new institutions was meant to help restore lost confidence and maintain it. Apparently it worked. Confidence in the banks improved.

The money wasn’t really there to back up the guarantees. It was an empty promise, but people felt better; and that seemed to be good enough. Fragile as the banking system was – and still is – people preferred having their money in the bank.

That preference did not in any way, shape, or form, translate to investor participation in the stock market. Still reeling from the collapse in stocks, people would sooner lend or give money to family members. If someone had any money to invest they usually bought bonds. It took almost two generations for stocks to become fashionable again.

NO RESERVATIONS FOR TODAY’S STOCK INVESTORS

The almost casual attitude towards selloffs in the stock market that exists in this century is the result of assuming that the market will right itself and go right back up in short order. Or, if things are serious enough, the Federal Reserve Cavalry will ride to the rescue – every time.

The expectation that the Fed will always bail out the banks and the financial markets has muted the word ‘caution’ when it comes to investing. Some people seem to fancy themselves as smart investors because they bought stocks this past spring and are now feeling the euphoria from the effects of the Fed’s injection of the money drug into their financial veins.

We seem to have forgotten how difficult it was to extricate ourselves from a similar mess little more than a decade ago. The financial markets may have recovered more quickly this time but the economic backdrop is more characteristic of a patient that is “terminally ill but resting (un)comfortably”.

The Fed is very aware of how precarious the situation is. They have pulled out all the stops in their quest to “bring back inflation”. They are fighting an uphill battle. The chart below shows the declining effects of the inflation created by the Fed over the last half-century…

Capacity Utilization Rate – 50 Year Historical Chart

This chart shows capacity utilization back to 1967. Capacity utilization is the percentage of resources used by corporations and factories to produce finished goods.

As you can see in the chart, the capacity utilization rate has been trending down in regular stair-step fashion for more than fifty years. A possible reason could be an increase in the efficient use of the available resources. Rather, though, the declining capacity utilization rate is more reflective of an ongoing decline in the demand for finished goods.

Neither of those reasons are consistent with the expectations from ongoing inflation that the Fed creates. The actual results are indicative of a multi-decade decline in the demand for finished goods; a long-term slowdown in economic activity.

Here is another chart. This one shows the relationship of gold’s price to the monetary base…

Gold’s Price To The Monetary Base – 100 Year Historical Chart

In the chart immediately above, we see that the ratio of gold’s price to the monetary base is in a long-term decline that has lasted for over one hundred years. This seems somewhat contradictory when compared to what some think they know about gold.

Gold’s higher price over time is a reflection of the ongoing decline of the U.S. dollar. The decline (loss of purchasing power) in the value of the U.S. dollar is the result of the inflation created by the government and the Federal Reserve.

The increase in the monetary base is an indicator of the extent to which the government and the Fed have debased the money supply. The continual expansion of the supply of money and credit leads to the loss in purchasing power of the dollar.

Some gold analysts and investors believe that increases in the monetary base lead to similarly proportionate increases in gold’s price. But that is not what is happening.

Gold’s price increase for the past one hundred years does not correlate with the increase in the monetary base. The price of gold reflects the actual loss in purchasing power of the U.S. dollar.

Inflation created by the Fed is losing its intended effect. It’s resulting effects on the economy are similar to those of drug addiction. Over time, each subsequent fix yields less and less of the desired results.

THE FED KEEPS TRYING

Jerome Powell’s announcement of a ‘major policy shift’ is borne out of fear and frustration. The intention of moving towards “average inflation targeting” while allowing inflation to run higher than the standard 2% target is meaningless.

If you continually fall short of your original 2% target, how can you possibly “allow inflation to run higher”? That is like saying that your car will only go forty mph but you want it to go fifty mph. Nothing you have done so far has been successful in getting your car to go fifty mph. As a result, you announce that you are going to allow you car to go sixty mph for awhile. Huh?

Mr. Powell’s statement is an admission that the Fed has lost control. This does not mean that they necessarily had much control over things in the past, either; but the Fed definitely can influence the financial markets. For example…

“…as the Fed slashed interest rates to nearly record lows from 2001 until mid-2004, housing prices climbed far faster than inflation or household income year after year. By 2004, a growing number of economists were warning that a speculative bubble in home prices and home construction was under way, which posed the risk of a housing bust.” (source)

Fed Chairman Alan Greenspan’s response to the potential threat of a housing bust was that housing prices had never endured a nationwide decline and that a bust was highly unlikely.

Even after the fact, during his testimony before the House Committee on Oversight and Government Reform, Greenspan referred to his own reaction to the credit crisis and its economic destruction as one of “shocked disbelief”. The former Fed chairman is blamed by some for the credit crisis of 2007-08.

The Federal Reserve has a history of implication regarding causes of financial and economic disaster; and, on occasion, they have admitted their part:

“Let me end my talk by abusing slightly my status as an official representative of the Federal Reserve. I would like to say to Milton and Anna: Regarding the Great Depression. You’re right, we did it. We’re very sorry. But thanks to you, we won’t do it again.”…Remarks by Governor Ben S. Bernanke (At the Conference to Honor Milton Friedman, University of Chicago -Chicago, Illinois November 8, 2002)

Three years later, Mr. Bernanke had succeeded Mr. Greenspan and was at the helm as Chairman of the Federal Reserve when storm-tossed seas amid waves of financial debt threatened to destroy the ship completely – again.

I wonder if Mr. Bernanke regrets his public admission in behalf of the Federal Reserve; he seemed to be in a hurry to leave his post at the end of his initial term as Chairman.

As The Depression Of The 21st Century unfolds, here are some charts of various economic indicators that bear watching…

Continued Jobless Claims Historical Chart

The chart above shows that the current level of continued jobless claims is twice as high as it was at its peak in June 2009; and that is after declining forty percent from its peak earlier this year in April.

Housing Starts Historical Chart

The above chart of Historical Housing Starts puts into perspective the action and attention in today’s market for new homes. It is true that housing starts are nearly back to their peak from just before economic fallout from the Covid-19 response. Nevertheless, they are still thirty percent lower than their peak in 2006 prior to the mortgage crisis associated with the Great Recession. In addition, the activity level of new housing starts for the past decade is lower than any decade as far back as the 1960s.

Durable Goods Orders – Historical Chart

As the above chart shows even at their post-pandemic recovery highs, durable goods orders are still lower than at any other point dating back to the early 1990s (the exception being the brief spike downwards in 2009).

5 Year 5 Year Forward Inflation Expectation

The chart above measures the expected average inflation rate over the five-year period that begins five years from today. Expectations for the future rate of inflation continue to decline and reached their lowest point since December 2008, and lower than any other point in this century.

Expectations for lower rates of inflation are consistent with the trend of actual rates of inflation shown on the chart below…

Historical Inflation Rate by Year

Inflation rates in this century are lower than any comparable period of time going back to the 1950s-60s.

We spoke earlier in this article about declining demand for finished goods. Raw goods have been affected by lack of demand, too. One of these is crude oil.

Below is a chart showing the phenomenal increase in oil reserves that has occurred over the first two decades of the 21st Century…

U.S. Crude Oil Reserves – 110 Year Historical Chart

The huge increase in crude oil reserves depicted above (May 2008 – current) corresponds perfectly with the huge decrease in the price of oil over that same time period.

In May 2008, crude oil peaked at $145 bbl. In March of this year, it posted a low price of $11 bbl. There are reports that the immediate spot price for crude oil on tankers and ready for delivery actually approached zero. However, $11 bbl still represents a decline in its price of ninety-two percent.

Demand in luxury goods markets has suffered, too. The World Gold Council announced that jewelry demand in the U.S. fell 34%, compared to the second quarter of 2019; and for the first six months of the year jewelry demand fell 21% to an eight-year low.

The World Gold Council said that jewelry demand also fell to historic lows in European markets, dropping 42% in the second quarter and for the first half of 2020 was down 29%.

CONCLUSION

The upshot of all this is that the effects of inflation are growing more muted over time. More and more stimulus has less and less impact.

Also, the demand for money is increasing. People need money – not more credit. Inflating the prices of financial assets might make it look like things are getting better, but the reality of it all is that while financial asset prices recover and go to new highs, the economy never regains its full health.

The relative difference between stocks at all-time highs and the current state of the economy is growing larger. Some might think that higher stock prices are an indication of expectations for the eventual full recovery of the economy; but that is not the pattern of the economic cycle this century.

For the past twenty years, and longer according to some of the charts above, economic activity is stagnating and weakening. Each bout with financial catastrophe leaves the economy weaker overall, and it never fully recovers. It just continues to muddle along.

Wall Street, the banks, and some investors seem to do well enough; but the comfort and overall good feelings associated with a rising stock market seem disproportionate to the disappointing level of well-being and optimism emanating from the general public and small businesses.

At this time, the economy is a better indicator than stocks and bonds (house prices, too) of our financial health. We are currently in poor financial health and before we can get better, we will experience a healing crisis of immense proportion. (also see Supply And Demand For Money – The End Of Inflation?)

Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT

Multilateral Fiscal Support for African Governments Addresses Liquidity More than Solvency Risk

Download Scope Ratings’ full report on Africa’s debt crisis and multilateral initiatives.

Fiscal vulnerabilities among African sovereigns were building in the years even before this year’s pandemic. This reflected challenging economic conditions, unfavourable exchange-rate and commodity-price changes, alongside significant new borrowing – including loans from Africa’s largest bilateral lender, China, and increased bond issuance.

Covid-19 has pushed most African economies into recession, driven, among other factors, by lost tourism revenues, falls in commodity prices and a decline in remittances. Real GDP in 2020 is set to contract by 2.3% on average across the continent, tax revenues will shrink and pressures to increase expenditure have risen.

An emphatic policy response needed in Africa, however fiscal constraints prevail

“This calls for an emphatic policy response,” says Dennis Shen, director at Scope. “Reinforcing public health systems, providing emergency food where necessary, offering income relief to vulnerable persons and supporting strategic economic sectors and small and medium-sized enterprises are short-term priorities alongside the long-term need to bolster economic development.”

However, in addition to overcoming weak governance structures and administrative capacities for the policies’ effective implementation, such measures also come with considerable price tags. Many African governments lack the fiscal space to implement such relief programmes without jeopardising the sustainability of their public debt.

African countries’ average public debt ratio increased from a 2011 low of 38.5% of GDP to 62.3% in 2019, while debt ratios more than doubled in that period in one third of the 53 economies on which there’s data. The burden of servicing debt has risen in parallel: regional average interest payments doubled from 5% to just under 10% of government revenues over the same period.

Multilateral institutions have increased emergency lending and debt service suspension

Multilateral organisations have ramped up emergency support in the form of loans and grants of around 0.6% of Africa’s 2019 GDP to-date, while the G20 has agreed on a Debt Service Suspension Initiative (DSSI) with average savings of 0.6% of 2019 GDP.

“International initiatives can support African sovereign creditworthiness, though, critically, DSSI debt relief has led to suspension rather than outright debt forgiveness,” according to Shen. “The international support programmes primarily address short-run liquidity rather than long-run solvency issues.”

“In addition, any private sector involvement in DSSI could be tied to a temporary (selective) default credit rating – potentially restricting market access near-term,” Shen says. “However, such a default credit rating in a scenario of private sector involvement would likely be transitory and, longer term, involvement of private sector creditors in debt relief could be viewed as positive for creditworthiness especially were underlying solvency issues addressed.”

DSSI elements such as enhanced debt transparency, multilateral monitoring and borrowing ceilings are considered by the rating agency as positive for the region’s sovereign ratings.

Governments will need to independently weigh the benefits vs costs of debt suspension participation

“Governments will need to judge the benefits of participation in DSSI – especially of any element of private debt bail-in – against the costs,” Shen says. “If a suspension of 2020 bond coupon and principal payments leads to a significant debt service hump in future years, this could be considered a significant risk even after a debt suspension – given potential for renewed debt distress over future years.”

“Conversely, if an economy’s debt sustainability is adequately enhanced by momentary suspension of debt payments to official and/or private sector lenders and repayment schedules are subsequently smoothened, this could support stronger market access and lower borrowing rates long term, and with this, bring a potentially stronger sovereign credit rating long term.”

The ongoing shift in African governments’ funding source in the direction of markets and China

Rising public debt burdens have coincided with a shift in African governments’ reliance on multilateral institutions and bilateral lenders towards capital markets. There has been a parallel longer-term shift to non-Paris Club bilateral creditors, predominantly China. The proportion of private funding has risen, up at almost 40% of public and publicly guaranteed debt in 2018.

Increased issuance of sovereign bonds can diversify a country’s investor base and subject a government to market discipline especially in crises, but it comes with higher borrowing costs than concessional multilateral and bilateral loans and increases exposure to volatility in investor sentiment.

Multilateral and bilateral financial support alongside debt relief initiatives, such as the DSSI, support African governments’ capacities to cope with the economic and public-health crises – they mitigate economic and financial damage, ease immediate liquidity risk, and can improve sovereign creditworthiness over time.

For a look at all of today’s economic events, check out our economic calendar.

Dennis Shen is a Director in Sovereign and Public Sector ratings at Scope Ratings GmbH. Thibault Vasse, Sovereign Ratings Analyst of Scope, co-authored this article.

September Monthly

New lows for the year against the euro, Swiss franc, the British pound, Swedish krona, and the Australian dollar were recorded in recent weeks. The Dollar Index (DXY), which is heavily weighted toward Europe, fell by over 4% in July, the largest monthly decline in a decade, and another 1.25% in August. In fact, the Dollar Index has not risen on a monthly basis since March. The surge in gold (reached a record high near around $1975 an ounce) was also seen in some quarters as an expression of dollar bearish sentiment.

The interest rate support for the dollar has fallen. Of course, with around $14.5 trillion of negative-yielding bonds, mostly in Europe and Japan, the US still offers a premium, but the premium has narrowed, and when hedging costs are included, it has disappeared. Growth differentials also had favored the dollar, but it is not so clear anymore. The eurozone’s August Purchasing Managers Survey disappointed, and as the month ended, the virus appears to be growing faster in Europe than the US. Yet, as with the interest rate differentials, growth differentials are simply less dollar supportive, and that is the takeaway.

It is not as if all things were equal. The relevant pre-existing conditions in this context were two-fold. First, after trending higher for several years, by various metrics economists use, the dollar was over-valued prior to the pandemic. At the end of last year, according to the OECD’s measure of purchasing power parity (a rough approximation of value in a world of currencies that are no longer backed by gold), the dollar was terribly rich against most of the major currencies.

The euro was estimated to be a little more than 26% undervalued against the US dollar Sterling was next, nearly 11% undervalued. The Canadian dollar was almost 9% undervalued, and the Japanese yen was 7% cheap to the greenback. As of June, the Economist’s “Big-Mac” model of purchasing power parity had the euro more than 16% undervalued, and sterling was 25% undervalued.

The second pre-existing condition was that growth and interest rate differentials attracted significant portfolio flows into the US. US stocks have outpeformed European shares handily over the past 3, 5, and 10-years. The narrowing of yield differentials means that US Treasuries have outpeformed German, British, and Japanese bonds over the past couple of years. This suggests that many asset managers are overweight US exposure. One estimate (13D Global Strategy and Research) suggested is that there has been “nearly $10 trillion of global capital concentration into US assets in less than a decade.”

Still, European stocks (Dow Jones Stoxx 600) outperformed US shares (S&P 500) on the downside in the first three months of the year and has underperformed in the recovery. June was the only month so far this year in which the Stoxx 600 outperformed the S&P 500 (~2.8% to 1.8%). In August, the S&P 500 gained around 7.2%, more than twice the Dow Jones Stoxx 600 3% gain. Year-to-date, the S&P 500 is the only G7 equity market index positive for the year.

Equity portfolio investment tends to carry low currency hedge ratios, and the greenback’s decline adds a tailwind for dollar-based investors in European markets. The Swedish stock market, for example, performed marginally better for unhedged dollar-based investors than the S&P 500 so far this year (~8.6% vs. 8.2%).

In a nutshell, the dollar’s main supports have weakened, it was overvalued, and it was a crowded trade. The adjustment has been nearly relentless. The euro has fallen in only five weeks since the end of April (19 weeks). Speculators in the futures market have amassed record net and gross long euro positions, and still, the biggest pullback has been limited to about 2.5-cents.

Most of the major central banks did not meet in August, and their September meetings will draw attention. Several central banks, including the Federal Reserve, the European Central Bank, and the Bank of Japan, will update their economic forecasts. The Federal Reserve may be the most likely to adjust policy as a follow-up to its formal decision to target the average rate of inflation.

Still, on balance, it might not be prepared to move quite yet to cap interest rates or boost it bond-buying, even though Congress has been unable to provide fresh fiscal stimulus. The Fed has not achieved its 2% inflation target since 2012. As of August 25, the Fed’s balance sheet was nearly $180 bln (~2.5%) below its peak in mid-June.

Many emergency measures were initially for six months or so, and governments and central banks will face some difficult choices. Most of the Fed’s facilities, though used less than anticipated, have been extended until the end of the year. The ECB has extended its Pandemic Emergency Purchase Program. The thrust of monetary policy is shifting from its initial efforts to ensure orderly markets to supporting the recovery.

Without a vaccine, a partial and uneven recovery may be the best that can be expected over the coming months. This means that elevated unemployment levels will prevail, even if partially hidden or socialized through furlough and short-time schemes. Canada has announced both a four-week extension of its emergency income program (through mid-September) before modifying initiatives to put them on a more sustainable basis. It has also extended its loan program for businesses.

In Germany, Finance Minister Scholz, who will be the Social Democrat candidate for chancellor next year, has pushed through an extension of its short-term work program (~government picks up about 2/3 of the wages for households with children) for 24 months from 12. France is preparing a large stimulus effort. UK Chancellor Sunak is under increasing pressure to extend funding for the furlough program that is supporting around four million people, but parts of Her Majesty’s Treasury is pressing for some funding through new taxation.

That said, with numerous vaccines in various stages of development, optimism is running high. Many governments are relaxing some of the procedures around creating vaccines to expedite the process. Until a vaccine is available of which people can be confident, flare-ups may be unavoidable, but they can be minimized and limited in scope. That will be the challenge in September. As the US flare-up appears to be being brought under control in late August, the contagion is rising in the Asia Pacific region and parts of Europe.

The US-Chinese relationship has deteriorated on many fronts, two issues that had been flashpoints, trade, and currency, have become less so. China has stepped up its imports of US agriculture goods, and with 19 tankers carrying a combined 37 mln barrels of oil from the US (~$1.55 bln), its energy imports will surge in September. Although many observers have emphasized that China is far behind its numerical commitments, top US officials (including Navarro, Lighthizer, and Kudlow) all publicly stated that the agreement was intact, and China was adhering to the deal.

A year ago, the US was citing China as a currency manipulator as the dollar rose above CN7.0. However, the link between the geopolitical competition and the yuan has loosened. The yuan traded at seven-month highs against the dollar at the end of August. Its nearly 2% gain makes it the strongest in the region last month. The JP Morgan Emerging Market Currency Index fell a little more than 0.5% in August, paring July’s roughly 2.4% rise. Regionally, South America underperformed, alongside the Turkish lira, which fell to new record lows in August (~-5.2%). After the lira, the next three emerging market currencies were Brazil real (~-4.7%), Argentine peso (-2.5%), and the Chilean peso (~-2.2%).

Dollar:

After trending lower since March, the dollar traded weakened broadly in the second half of August. Sentiment remains bearish as growth and interest rate differentials supports have been undermined. Although there has been some impact of the loss of the $600 a week in federal unemployment insurance and the fading effect of other fiscal efforts, the economic data have been mostly better than expected. Estimates for Q3 GDP around a little above 20% at an annualized rate. That said, there is concern that a quarter or more of the jobs there were lost temporarily will turn into permanent losses.

The Federal Reserve meets on September 16. The steepening of the yield curve through a relative increase in long-term yields cannot come as a surprise to Fed officials after adopting the average inflation rate target. Yet, on balance, it does not seem quite ready to move to cap rates either through yield curve control or through increased bond buying. The political campaigns get into full swing after Labor Day (September 7). It has yet to become much of a market factor except that investors appear to be buying options for protection, and this is seeing the volatility curve steepen.

Euro

The euro has not been the best performing major currency this year, this quarter, or last month. Its 6.6% advance through the first eight months puts in fourth place within the top ten major currencies against the US dollar. Most of those gains were registered here in Q3, where it is in fifth place. It was appreciated by a little less than 1.5% in August. Speculators have amassed a record net and gross long euro positions in the futures market.

The ECB meets on September 10 and is not expected to take new action. The economy has generally performed in line with the staff forecasts last updated in June when it forecast an 8.3% expansion here in Q3. The WTO may announce its preliminary ruling on EU charges that Boeing received illegal government assistance and could be a new flashpoint in the evolution of the trade relationship. In late August, the EU ended its controversial tariff on US lobster in exchange for reduced levies on around $200 mln of EU consumer goods.

(end of March indicative prices, previous in parentheses)

Spot: $1.1935 ($1.1780)
Median Bloomberg One-month Forecast $1.1905 ($1.1570)
One-month forward $1.1945 ($1.1785) One-month implied vol 7.9% (7.8%)

Yen

The dollar traded between JPY104 and JPY108 in July and a narrower JPY105-JPY107 range in August. On a purely directional view, the yen tends to weaken when US yields rise and/or when the S&P rally. The three-quarter contraction that began in Q4 19 with the sales tax increase and typhoon appears to be ending here in Q3.

Prime Minister Abe will step down due to health reasons around the middle of September when the LDP picks his successor. The situation is still fluid, and Cabinet Secretary Suga seems may get the not, which would underscore the continuity we see as the most likely outcome. The Diet’s term is up in a year, but the LDP may want a sooner election.

While there may be an alternative to Abe, there may not be for Abenomics, which is arguably the traditional policy thrust of the Liberal Democrat Party of loose monetary policy, deficit spending, and raise the consumption tax. A supplemental budget for the second half of the fiscal year (begins October 1) seems more likely that fresh initiatives from the Bank of Japan, which meets on September 17. BOJ Governor Kuroda is seen likely to fulfill his current term, which ended April 2023.

Spot: JPY105.90 (JPY105.85)      
Median Bloomberg One-month Forecast JPY105.95 (JPY106.50)     
One-month forward JPY105.90  (JPY105.90)    One-month implied vol  7.4% (7.3%)

Sterling

The pound fell by about 6.5% in H1 20 and rebounded by about 7.8% through the first two months of Q3.  Sterling made a new marginal high for the year in late August, a little below $1.34 on the back of a softer US dollar. The UK economy shrank by a fifth in Q2, the most in the G7, but appears to be gaining traction, though there is still pressure to extend the employee furlough program.  There has been little progress in trade negotiations with the EU.
A break-through is needed in the coming weeks in time for the mid-October EU summit and allow members sufficient time to ratify the agreement. This continues to seem unlikely. The potential disruption may already be a factor underpinning implied volatility.  Yet, August was the second consecutive month that sterling rose against the euro, and is near its best level in two-and-a-half months at the start of September.
Spot: $1.3370 ($1.3085)   
Median Bloomberg One-month Forecast $1.3285 ($1.2820) 
One-month forward $1.3370 ($1.3090)   One-month implied vol 8.7% (8.6%)

Canadian Dollar

The Canadian dollar was one of the strongest major currencies in August, appreciating about 2.9% against the US dollar.  Rising equities speaks to the elevated risk appetites that are correlated with the Canadian dollar. Rising commodity prices (CRB Index rose about 6.8% in August, its fourth consecutive monthly gain and now is above its 200-day moving average for the first time since January) have also been supportive.
Since the middle of March, the US dollar has fallen by about 11.3% against the Canadian dollar, but speculators in the futures market continue to carry a net short futures position. The Canadian dollar is the only major currency that is depreciated against the US dollar this year.  A scandal over favoritism and a dispute over fiscal policy led to the resignation of Finance Minister Morneau, but it did not derail the Canadian dollar’s recovery.
Canada has been more cautious than the US in lifting containment measures while seeing a slightly higher percentage of returning workers. The Bank of Canada meets on September 9 and is not expected to change policy. New fiscal initiatives are likely to be outlined on September 23, when the new session of parliament begins.  Ottawa’s decision about Huawei, on the one hand, and how to respond to the new US tariffs on Canada’s aluminum, on the other hand, risks escalating tensions with both Beijing and Washington.
Spot: CAD1.3045  (CAD 1.3410)
Median Bloomberg One-month Forecast  CAD1.3100 (CAD1.3515)
One-month forward  CAD1.3000  (CAD1.3415)    One-month implied vol  6.5%  (6.3%) 

Australian Dollar

The recovery of the Australian economy seemed to lag behind others even before the flare-up that led to the lockdown in Victoria.  Australia lost about 375k full-time positions between February and June and only gained 43.5k back in July (~11%).  However, the government has reduced the JobKeeper and JobSeeker payments.  Still, in the fiscal year that began July 1, the government anticipates a boost in spending and a reduction of tax revenues of around A$185 bln.

The Australian dollar gained about 3.3% in August, its fifth consecutive monthly increase, and is up about 5.1% for the year.  Reserve Bank Governor Lowe admitted to preferring a weaker currency, but suggest intervention would only be effective if there was a valuation misalignment. The OECD’s model of Purchasing Power Parity puts fair value at closer to $0.6950 (~5.7% over-valued), which represents a relatively modest deviation.

Spot:  $0.7375 ($0.7145)       
Median Bloomberg One-Month Forecast $0.70315 ($0.7035) 
One-month forward  $0.7380  ($0.7150)     One-month implied vol 9.8%  (10.4%)   

Mexican Peso:

The peso gained about 1.8% against the dollar in August, making it among the strongest of the emerging market currencies. The peso is off around 13% year-to-date, and the substantial depreciation that could still feed through to domestic prices.  Consumer prices have firmed in recent weeks and are now at the upper-end of 2%-4% target range.  After cutting the overnight rate by 50 bp at the past five meetings to 4.5%, Banxico sees itself with limited scope for additional easing.
The next meeting is on September 24, and it will likely standpat.  Outside of the auto sector, Mexico’s economy is still reeling from the virus and the limited policy response.  A new corruption scandal in President AMLO’s family may complicate next year’s local and state elections, but had little impact on the Mexican peso.

The dollar has been trading between MXN21.85 and MXN23.00 since the middle of June.  It edged lower to MXN21.74 into the end of the month before bouncing back to nearly MXN22.00 where it finished the month.  In the low interest-rate environment, the 4.5% available on short-term Mexican bills (cetes) is attractive and keeps the peso stronger than the macroeconomic considerations would suggest.

Spot: MXN21.89 (MXN22.27)  
Median Bloomberg One-Month Forecast  MXN21.92 (MXN22.12) 
One-month forward  MXN21.96 (MXN22.37)     One-month implied vol 13.4% (14.7%)

Chinese Yuan

The recovery of the world’s second-largest economy is being stymied by floods and weak domestic demand. The floods are disrupting food supplies and elevating prices.  By late August, and estimated $26 bln of damage has been inflicted and four million people displaced.
Agriculture imports have been boosted to meet the shortage of domestic supply.   Many expect the PBOC to continue to ease policy in a targeted way while holding back from the asset purchases that other major central banks are undertaking.  Since late May, the dollar has depreciated by around 4.7% against the Chinese yuan.   Chinese officials have allowed the yuan’s exchange rate to become decoupled from the ongoing political tension.
The yuan strengthened in seven of the nine weeks of Q3 through the end of August to finish near seven-month highs.  We suspect there is a limit to how much Beijing will allow the US to depreciate the dollar, but the 1.7% depreciation thus far this year is modest by any measure, and still fits the official rhetoric about the yuan’s stability.
Spot: CNY6.8485 (CNY6.9750)
Median Bloomberg One-month Forecast  CNY6.8815 (CNY7.0165)
One-month forward CNY6.9050  (CNY7.0795)    One-month implied vol  4.9% (4.4%)
For a look at all of today’s economic events, check out our economic calendar.

This article was written by Marc Chandler, MarctoMarket.

The Federal Reserve vs. Judy Shelton And Gold

A letter published and signed by former Federal Reserve officials and staffers called on the Senate to reject her nomination, stating that “Ms. Shelton’s views are so extreme and ill-considered as to be an unnecessary distraction from the tasks at hand…”

Her “extreme” views were referred to in a general statement of condemnation:

Ms. Shelton has a decades-long record of writings and statements that call into question her fitness for a spot on the Fed’s Board of Governors”. This was followed by a citation of the specific issues:

“She has advocated for a return to the gold standard; she has questioned the need for federal deposit insurance; she has even questioned the need for a central bank at all.” 

FED CONDEMNATION OF SHELTON IS MOTIVATED BY FEAR

Would these specific views have been considered extreme a century ago? No. Are they extreme now? No. Then why all the fuss?

The statement by former Fed officials has been published openly and is prompted out of fear. Fear of discovery and exposure; and fear of a possible end to the biggest Ponzi scheme of all time.

If someone with Ms. Shelton’s views were to be sitting on the Federal Reserve Board of Governors, that individual would have a platform to call attention to the facts at hand. More public recognition of those facts could change measurably the current perception of the Fed. In addition, it might also signal the possible end of the central bank.

It was established in 1913 by congressional vote. It is, ostensibly, an institution that is responsible for, and actively pursues management of the economy. The goal is economic stability.

PURPOSE OF FEDERAL RESERVE

But that is not its true purpose. The Federal Reserve is a “banker’s bank”. As such it facilitates and orchestrates a financial environment that allows banks to do what they do best – loan money.

On a retail basis, this “power” to create and loan money is best illustrated by the system of fractional-reserve banking. The system of fractional-reserve banking fosters an unending expansion of the money supply via loans. That is what banks do: create money, loan it to others, and collect interest. (see: Origin And Danger Of Fractional-Reserve Banking)

The Fed’s expansion of the supply of money and credit, along with additional creation of money in the form of loans granted via fractional-reserve banking, is inflation. The loss of purchasing power of the US dollar and the higher prices you pay overtime for all goods and services are the effects of inflation that has already been created by governments and central banks.

If Judy Shelton was confirmed as a member of the Federal Reserve Board, maybe she would say more about this publicly in her new role. Or maybe she would become silent.

More than forty years ago, a former Fed chairman, who at the time was an economist and private consultant, received some similar attention because of some not entirely dissimilar viewpoints, particularly about gold and the gold standard. After his appointment as Chairman of the Federal Reserve Board of Governors in 1987, Alan Greenspan said very little about gold.

As a board member, Ms. Shelton will not be in control; but she might be a disruption to ‘business as usual’ at the Fed. Maybe this is what is meant by the reference to Ms. Shelton’s views as “an unnecessary distraction from the tasks at hand”.

Probably the most blatant condemnation of Judy Shelton comes in an article by Steven Rattner, titled “God Help Us If Judy Shelton Joins The Fed”.

For some people, it might make more sense to say “God Help Us If Judy Shelton’s Nomination Is Not Confirmed”. On the other hand, it might not make any difference.

Mr. Rattner said that “The Federal Reserve is an indispensable player in managing our economy”. That cannot even scarcely be considered a true statement when the facts are known and acknowledged.

The truth is that the Federal Reserve has been mismanaging the economy for over one hundred years. The effects of their infinite money creation have destroyed the value of the US dollar which is now worth only $.01 cent compared to $1.00 when the Fed assumed command.

Since the effects of inflation are volatile and unpredictable, the Federal Reserve spends most of its time now trying to manage the ill effects and unintended consequences of its own actions.

GREAT DEPRESSION – FED MADE THINGS WORSE

Regarding Ms. Shelton’s views on gold, Mr. Rattner referred to the gold standard as “a significant culprit in deepening the Great Depression” which is not true.

The length and depths of the Great Depression were the results of government attempts to fight the necessary purging that was taking place. If it had been allowed to run its course without public works programs, wage supports, and a national government who tried to “spend” us into recovery and wellness, the Great Depression would have been over much sooner

Under a gold standard, accompanied by convertibility, gold acts as a restraint on a free-spending government. The reason all nations have abandoned a gold standard is that they do not want to be limited in their desire to create limitless amounts of fiat money. (see Gold, US Dollar And Inflation)

As it appears now, Judy Shelton brings a refreshingly different perspective to central banking; and offers the potential for positive change – from the inside.

If that were not the case, it is doubtful that so many of those with influence within that domain would be so open in their attempts to stop her.

Kelsey Williams is the author of two books: INFLATION, WHAT IT IS, WHAT IT ISN’T, AND WHO’S RESPONSIBLE FOR IT and ALL HAIL THE FED!

A Look at the Price Action

Make no mistake about it. After a wobble, the dollar fell. It recorded new lows for the year against the British pound, Australian dollar, and Swedish krona ahead of the weekend. New lows for the month recorded against the Canadian dollar and Norwegian krone. The euro and yen flirted with the edges but remained within their well-worn ranges.

It is the interest rate markets that saw a more nuanced response. The implied yield of the December 2022 Eurodollar futures contract rose 1.5 bp last week. The five-year yield also rose (less than a basis point), as the Fed signaled it would be more accepting of an inflation overshoot as a type of forward guidance meant to underscore its commitment to keep rates low for the foreseeable future.

The long-end of the curve backed up, with the 10-year yield rising 10 bp, and the 30-year yield increased 13 bp. However, the upside momentum was unsustainable, and yields pulled back from their best levels ahead of the weekend despite stronger than expected income, consumption, and deflator numbers.

Dollar Index

Ahead of the weekend, the Dollar Index approached the two-year low set in the middle of the month near 92.00. There was no meaningful bounce, and the broad sideways movement seen in the past few weeks has alleviated the over-extended momentum indicators.

A break of 92.00 would set the stage to test the 91.00 area, which has more technical significance. It is also the initial (38.2%) retracement of the rally in the Dollar Index from the historic lows in 2009 (~70.70). A move above 93.50 is needed to neutralize the negative technical tone.

Euro

Here in August, the euro has traded above $1.19 in six sessions and closed above it exactly twice and once was before the weekend. Perhaps it is a question of market positioning, where speculators in the futures market had amassed a record-long gross and net position and extended it further in the week ending August 25.

The broad, sideways movement in recent weeks ($1.17-$1.19) has seen the momentum indicators trend lower, but the firmer tone in recent days has steadied the MACD and Slow Stochastic, which now appear poised to turn higher. The upper Bollinger Band will begin the new week near $1.1925. A close above $1.20, is probably needed to signal a breakout. Support appears to have been carved around $1.1755-$1.1760 area.

Japanese Yen

The combination of the FOMC and Abe’s resignation saw the dollar transverse nearly its entire month’s range (~JPY105-JPY107) ahead of the weekend. Momentum traders have been whipsawed. The outside up day on August 27 was followed by an outside down day on August 28. The momentum indicators are not particularly helpful now. The dollar spiked to about JPY104.20 at the end of July, which was a four-month low and that is the obvious target on a break of JPY105.00, but the measuring objective of the chart pattern may be closer to JPY103.00.

British Pound

Sterling motored to new highs for the year ahead of the weekend a little above $1.3350. It has not ended a month above $1.33 since April 2018. The strong close leaves it in good shape to continue its run (three consecutive weeks and it has only fallen in two weeks here in Q3). While the MACD is uninspiring, the Slow Stochastic is turning higher after correcting from over-extended levels. The next important technical area is near $1.35. A caveat is it closed well above its upper Bollinger Band (~$1.3280).

Canadian Dollar

Nothing has been able to derail the greenback’s steady decline against the Canadian dollar, which has now been stretched into the seventh consecutive week. It has risen in one week here in Q3 and that was by about 0.3%. The US dollar pushed through CAD1.3050 briefly to fall to its lowest level since January, but it recovered a traced out a possible bullish hammer candlestick.

The long downtrend has left the momentum indicators stretched and do not appear to have confirmed the pre-weekend low. The downtrend line from March’s high will begin the new month near CAD1.3215. Only a break of this trend line is noteworthy, while CAD1.3000 has psychological significance and about CAD1.2985 is $0.7700. The lower Bollinger Band begins next week near CAD1.3080.

Australian Dollar

The Aussie was nearly flat coming into the start of last week and it gained almost 2.6% in the five-day rally that lifted it to almost $0.7360. It has not been at such levels since mid-December 2018. The next important technical objective is near $0.7500. It has fallen in only one week of the past 10 and that was by less than 0.2%. The Slow Stochastic corrected and is now turning higher. The MACD appears to be turning higher from its lowest level in a couple of months. On the other hand, the Australian dollar closed well above it upper Bollinger Band (~$0.7290), which also looks to be initial chart support.

Mexican Peso

The dollar appeared to have staged a key upside reversal on August 27 in the aftermath of the Fed’s statement. However, as cooler heads prevailed, the prospect of a faster-growing US economy and a softer inflation target by the Fed was understood to be good for emerging market currencies in general.

The JP Morgan Emerging Market Currency Index rallied a little more than 1% before the weekend, the most in a month. Its 1.5% gain for the week was the largest in nearly three months. The dollar lost about 1.4% against the peso ahead of the weekend to ensure its third consecutive weekly decline. The next target is the June low near MXN21.4650, around where the 200-day moving average is also found. The technical indicators offer little insight. Resistance is seen near MXN22.20.

Chinese Yuan

The dollar fell nearly 0.8% against the Chinese yuan last week. It has fallen in all but one week here in Q3. We had thought Chinese officials would have resisted more strongly the persistent demand for the yuan, which is at its strongest level since January. The dollar closed a gap left on the charts from the higher opening on January 21 near CNY6.8670.

The low for the year was set the previous day near CNY6.84. Technically, the CNY6.80-CNY6.82 would appear to offer support. It represents a retracement objective of the rally from the March 2018 low around CNY6.24 and the 200-day moving average.

Gold

The pre-weekend rally of about 1.3% prevented gold from falling for the third consecutive week. After testing $1900 in the middle of the week, gold rebounded initially in response to the Fed’s statement. It made it to almost $1977 before dramatically reversing back to $1910 before catching the bid ahead of the weekend that carried to nearly $1974. In the waning hours of activity, support was found ahead of $1960. Both the Slow Stochastic and MACD have corrected lower and now appear poised to turn higher. Initial resistance is in the $1995-$2000 range and then $2015.

Oil

The price of October WTI continues to trade broadly sideways in the $42-$43.50 range. It has progressed sufficiently for the contract to flirt with its 200-day moving average (~$43.15) without the kind of momentum that would usually signal a further advance. That said, October crude oil prices rose by about 1.5% to post the fourth consecutive weekly increase. A year ago, oil was a fifth higher.

US Rates

The US 10-year yields pulled back a couple of basis points ahead of the weekend to stop the four-day increase. Still, on the week, the 10-year yield rose 10 bp to around 73 bp, having traded a little above 78 bp. The 30-year yield edged up before the weekend to complete the fifth session higher. It reached 1.57%, the highest in a couple of months before settling back a little above 1.51%.

The September futures note tested the (50%) retracement of the rally from the June low around 138-22 at the end of last week and bounced off it. Are long-term interest rates on the rise? The technicals suggest otherwise. That said, the 10-year breakeven (spread between the conventional and inflation-linked bonds) rose to 1.77 bp, the most since April. Other market-based measures of inflation expectations are also elevated. The University of Michigan’s survey for 5-10-year inflation was confirmed at 2.7% in August, matching the high for the year.

S&P 500

The S&P 500 gapped higher to start the week and never looked back. The benchmark rose every day last week to bring its streak to seven sessions. The 3.1% rally was the biggest weekly rally of the month. As we have seen with some of the currencies, the S&P 500 has only fallen in one week over the past two months.

It began the week gapping above 3400 and finished the week poking above 3500 for the first time, which is just above the upper Bollinger Band. The trendline off the secondary low in March begins next week near 3400, which is also the bottom of the gap created by Monday’s higher opening.

This article was written by Marc Chandler, MarctoMarket.

Blame it on The Nasdaq

US data announced this week showed a significant recovery in building permits and housing, building permits (MoM) for July surged to 18.8% compared to the previous 3.5%, Housing Starts data revealed 22.6% which is 5.1% higher than the previous month, existing-home sales data were as well positive reported beyond expectations.

Despite the negative Jobless claims and Philadelphia Fed Manufacturing PMI reported on August 20, Manufacturing PMI and Services PMI demonstrated a significant improvement, which led major US Indices to surge whereas S&P500 and Nasdaq100 reached the all-time high.

US stocks continue hitting records, Tesla surged by 24.19% breaking the significant $2000 per share value, and is now worth more than $382 billion surpassing Walmart by nearly $10B. Nasdaq’s top company by market cap – Apple gained 8.23% hitting the $2127B in capitalization. Tesla and Apple remain the top popular shares last week based on Robinhood data.

S&P500 closed above the all-time high, some might think that there is a possible double top pattern, economic recovery of the US indicates that the index may continue the run towards $3500.

Nasdaq owes its gains not only to Tesla and Apple, but there are also other tech companies that surged last week and during the pandemic, such as NVIDIA, AMD, Qualcomm, Microchip Tech, Texas Instruments.

An hourly chart demonstrates that the correction is most likely will happen as the price touched the dynamic resistance and the fifth wave of an ending diagonal is about to complete at 11600. Ending diagonal is a trend reversal pattern, which usually demonstrates exhaustion of bulls, note the evening star doji, though the closing is above the previous close, it still shows uncertainty and exhaustion.

NDX chart by TradingView

How is it related to cryptocurrencies and Bitcoin?

Bitcoin and Ethereum price actions are considered as cryptocurrency market movers. Since Bitcoin is nowadays considered as the digital Gold and Ethereum as a digital Silver, their price action now is correlated to US data which effect Gold. Gold was ever since used as a safe-haven to hedge funds during the uncertain times and inflation, so is Bitcoin now.

An hourly chart of Bitcoin indicates that the price could decline further to towards $11200 – $11160 to complete the Head and Shoulders pattern, another pattern to watch is an ending diagonal which is yet to be completed as well. Bitcoin remains below the major resistance level of $11700 an in order to show another bull run it must break the dynamic resistance (ending diagonals upper edge) and close above the 11700, however testing 11200 might bring another stimulus for bulls.

BTCUSD price on Overbit

Ethereum plummeted to $380 after reaching the year’s maximum at $446.67, loosing 9.7% this week only. Digital Silver price is following a similar ending diagonal pattern, and if the upper dynamic resistance and a static resistance of 397 is not overpassed, ETH might continue the drop towards a major support at $380, and if that support is broken, towards $370 – 369.

ETHUSD price on Overbit

Unlike Bitcoin, Gold lost only 0.20% in price for the week. A significant drop was on Wednesday August 19 ahead of US data announcements, where the precious metal lost 3.67% after gaining 2.97% on Monday and Tuesday.

Head and shoulders pattern is identified on an hourly chart of Gold and the price might continue the drop down to $1881.60 – 1880, where if the support laid on those level withheld the price might retrace towards 2014 and if above towards 2046, where the bearish pattern will be completed.

Gold price on Overbit

Since Gold and Silver prices demonstrate similarities in their price action, the same Head and Shoulders is visible on an hourly chart of XAGUSD. The price is below the dynamic support of August 12 which might signal to a further decline down to $25.30.

Silver price on Overbit

The price continues the short-term downtrend move inside a descending channel, which in other had forms another controversial to the H&S pattern of Bullish Flag.

Silver price on Overbit

If bulls are able to push the price above the dynamic support and if the dynamic resistance is overtaken at $27, the bullish run might proceed towards $28 – 28.50.

Key takeaways for the upcoming week would be announcements from Eurozone, Great Britain, China and the US.

Important announcements to watch:

Tuesday, August 25, 2020

German GDP (YoY) as per Second quarter data is expected to be -11.7%, 9.8% lower than the previous -1.9%

German GDP (QoQ) as per Second quarter data is expected to be -10.1%, 7.9% lower than the previous -2.2

US CB Consumer Confidence (August) is expected to be 93, 0.4 points higher than the previous 92.6

US New Home Sales (July) is expected to be 786K, 10K higher than the previous 776K

Wednesday, August 26, 2020

US Core Durable Orders is expected to be 2.1%, 1.5% lower than the previous 3.6%

Thursday, August 27, 2020

US GDP (QoQ) as per 2nd Quarter is expected to be -32.6%, 0.3% higher than the previous -32.9%

US Initial Jobless Claims is expected to be 1,000K, 106K lower than the previous 1,106K

US Pending Home Sales (MoM) as per July is expected to be 4.5%, 12.1% points higher than the previous 16.6%

Asides from the data to be announced, there are other important events to trace.

Republican National Convention, which will be held on Monday, in which delegates will determine the nominees for the upcoming presidential elections. Markets will be watching this event closely as during the current campaign Democrats are having an edge over republicans.

Source: Yahoo Finance

Another major event would be an annual Jackson Hole conference this Thursday, August 27, where FED Chairman Jerome Powell will speak about current economic situation, inflation targets and possibly share preliminary focus on interest rate change.

The economic state and inflation in the US once again are an important constituent of the Global economy and global markets, all these events will be decisive for the mid-term price movements for the US Indices, commodities and cryptocurrencies.

Gold and the Dollar are Sold while Stocks March Higher

The Dow Industrials and S&P 500 rose, the high flying NASDAQ fell for the second consecutive session for only the second time since May. However, today, the “rotation” seems to be only impacted gold, which is off for the third consecutive session, its longest decline in three months, helped by sales from the ETFs, which have been significant buyers.

The yellow metal is off almost 2% to around $1983. The technical target we suggested was $1950 on a break of $2000. Equities are rallying. Japan returned from yesterday’s holiday and took the Topix up 2.5% (Nikkei 1.95) and Hong Kong’s Hang Seng tacked on 2.1%, amid optimism Beijing preparing new tourist visas to Macau.

European shares are up for a third consecutive session, and the Dow Jones Stoxx 600 has advanced around 2.0% through the European morning. US shares are firmer with the S&P 500, about 0.65% better. Benchmark bond yields are a little firmer, though the European periphery bonds are more resilient (likely owing to the Eurosystem purchases). The US 10-year yield, which had flirted with 50 bp last week, is approached 60 bp now. September light sweet oil is confined to about a 50-cent range above $42. US inventories are expected to have fallen again. Key resistance is seen near the 200-day moving average (~$43.70).

Asia Pacific

The US is continuing to ratchet pressure higher on China. Following the latest sanctions and actions against two Chinese apps, the US has indicated that after late September, goods made in Hong Kong will be labeled “made in China” and subject to the same tariff schedule as the mainland. This measure, like sanctioning HK Chief Executive Lam, is about signaling, as there is little real substance in terms of inflicting pain or disruption. As we have noted before, most goods the US imports from Hong Kong have been re-exported from China, and the goods actually made in Hong Kong are less than 1.5% of US imports from it.

Meanwhile, China appears to be reining in the strong lending seen earlier this year. Indeed, the July lending figures were weaker than expected. New yuan loans, which is what the formal banking system generates, rose by CNY992.7 bln, and economists were looking for something closer to CNY1.2 trillion after CNY1.8 trillion in June. Aggregate financing, which includes non-bank financial institutions (shadow banking), rose by CNY1.69 trillion, less than half of the CNY3.43 trillion in June.

Japan reported June balance of payments and trade figures. Japan’s balance of payments in surplus (JPY167.5 bln) but considerably smaller than May’s JPY1.18 bln surplus. However, Japan continues to run a trade deficit (on BOP basis JPY77.3 bln in June after a JPY557 bln deficit in May. Japan’s broader surplus is a function of its capital account and income from dividends, royalties, licensing fees, profits, and earnings from operations abroad. In contrast, consider German trade numbers that were out last week. Its trade surplus drives its current account surplus (15.6 bln euro trade surplus in June and a 22.1 bln current account surplus.

The dollar traded at new six-day highs against the yen near JPY106.20. Last week’s high was a touch below JPY106.50, and trendline resistance is seen closer to JPY106.70. The option expiring today for about $765 mln at JPY106.00 may still cause some angst if the dollar pulls back in early North American trading. Initial support is pegged near JPY105.70.

The Australian dollar is coming back bid after posting a small loss yesterday, its first back-to-back loss in a month. It has found support around $0.7140 and appears set to re-test the $0.7200-$0.7220 area. The dollar is about 0.2% weaker against the Chinese yuan (~CNY6.9475). The reference rate was set at CNY6.9711, compared with the median bank model collected by Bloomberg of CNY6.9693.

Europe

The German ZEW investor survey showed minor deterioration in the assessment of the current conditions, but optimism over the future continued to improve. The August survey showed the view of current conditions slipped to -81.3 from -80.9. Recall it bottomed at -93.5 in May. Expectations, on the other hand, rose to 71.5 from 59.3. This is a particularly strong reading and is the highest since 2003. Between loan guarantees and actual spending, Germany has been more aggressive than most other European countries in responding to the pandemic. We can’t help but wonder if this lays the foundation for new divergence in the coming years, even though the EU has a recovery fund and will issue a common bond.

The UK’s employment data may spur pressure to increase the furlough program. In Q2, employment fell by 220k, and the claimant count rose 94.4k in July. July payrolls were about 770k lower than in March. Many people are discouraged from looking for work in current conditions, and this is helping keep the unemployment rate at 3.9% (three-months to June according to the ILO). It has been at 3.9% all year, except in February, when it briefly rose to 4.0%.

Separately, reports suggest that the UK’s try to get better terms than Japan gave to the EU is jeopardizing being able to conclude a trade agreement by the end of this month. The issue, which the UK appears to put pride and spin ahead of substance is over blue cheese. Note that the free-trade agreement with Japan, which phases out UK tariffs on autos and auto parts, is estimated to boost UK’s GDP by 0.7% over the long-term while leaving the EU costs an estimated 5% of GDP.

The euro recorded a five-day low a little above $1.1720 before rebounding to $1.1785 in the European morning. Yesterday’s it briefly poked above $1.18, where there is an option for roughly 675 mln euros that will be cut today. An option for 2.1 bln euros that expires tomorrow is struck at $1.1875. The intraday technical readings are stretched, and this may encourage early North American dealers to sell into the euro’s upticks. After bottoming near $1.3055 in late Asian turnover, sterling is testing the $1.31 area, where it peaked yesterday. The intraday technical readings are not as stretched as the euro’s, but gains are likely to be capped in front of the $1.3140 area.

America

Ahead of the review of the Phase 1 trade agreement later this week, reports suggest China is stepping up its purchases for US soy. Six cargoes for November and December shipments apparently were bought yesterday. Reports suggest the new soy orders may be coming at the expense of Brazil.

President Trump opined that Q3 GDP could be 20%. While this could simply be a case of cheerleading and aspirational, it is notable that the Atlanta Fed’s GDP tracker currently puts it at 20.5%. The NY Fed’s model is at 14.6%. Trump has said he is considering a capital gains tax cut. While the executive branch does not have that authority, it could index capital gains to inflation, which has long been advocated by some Republicans.

The US reports July producer prices today. They are not typically a market-mover even in the best of times. The headline year-over-year rate will remain in deflationary territory, (-0.7% likely instead of -0.8%). Even when energy (and food) are dropped, the core PPI is expected to have remained near zero. Still, the week’s data highlights, which include CPI, retail sales, and industrial production, lie ahead. Canada reports July housing starts. They may ease after jumping by more than a quarter in the May-June period. Like the US, housing and autos, appear to be leading the Canadian recovery.

Mexico is expected to announce that the four-month slide in industrial output came to an end with a bang in June. The median forecast in the Bloomberg survey projects a 17.1% increase in the month, as the manufacturing sector got some traction even though the pandemic continues to hit hard.

The highlight for Mexico will likely be the rate cut later in the week (from 5.0% to 4.5%). Minutes from last week’s Brazil’s central bank meeting, where a 25 bp rate cut was delivered. These may prove more important than usual as investors try to work out how much easing is left and the chances that the central bank uses its recently granted powers to buy long-term assets (government and corporate bonds).

The US dollar has given back the gains against the Canadian dollar scored in the last two sessions. The greenback is pushing through CAD1.33, where a $712 mln option is set to expire today. Last week’s lows were set near CAD1.3235-CAD1.3245. That is the next target. That said, the intraday technicals are stretched. Resistance is seen in the CAD1.3340-CAD1.3360 area. The US dollar is at the lower end of the five-day range (MXN22.30-MXN22.32).

While there is some scope for intraday penetration, the market does not appear to have much conviction. Here, too, the intraday technicals are a bit stretched, suggesting limited scope for follow-through dollar selling in the North American morning. The dollar settled yesterday at its best level against the Brazil real in over a month (~BRL5.48). Nearby resistance is seen in the BRL5.50-BRL5.53 area. Support is pegged around BRL5.34-BRL5.35.

For a look at all of today’s economic events, check out our economic calendar.

This article was written by Marc Chandler, MarctoMarket.

The $1.32 Resistance Rejects Sterling’s Uptrend Throughout the Week

Prices rose to a high of $1.317 on Friday, July 31st, only a few cents below where GBP was trading before the global financial turmoil began.

As a new week was about to start, investors seem to have taken profits over the weekend. The increase in supply pushed the GBP/USD trading pair down by 0.73%.

Thus, the Pound kicked off the week of August 3rd at $1.309 while sell orders continued to pile up. The selling pressure was significant enough to send it further down by 0.53%. By 13:00 UTC, Sterling had reached an intraday low of $1.301. Nevertheless, this support level served as stiff resistance allowing it to rebound 0.80% to hit a high of $1.311 the following day.

Even though it seemed like the GBP/USD trading pair was bound for further gains, a sell-off took place on August 4th. Between 7:00 UTC and 12:00 UTC, the Pound plunged 0.97% to a weekly low of $1.298. This support level was met with a significant number of buy orders, which allowed it to enter a new uptrend.

Sterling went through a bull rally the next two days that saw it rise 1.57%. As prices took another aim at early March’s high of $1.320, this resistance zone was able to hold steady once again. The rejection resulted in a 1.34% nosedive, and the Pound hit a low of $1.301 a few hours before the weekly close.

Like it happened on Monday, August 3rd, this support level prevented GBP from a steeper decline. The rebound enabled prices to recover by 0.30%, and Sterling closed the week at $1.305. Despite the high levels of volatility seen throughout the week, the Pound only provided investors a weekly return of 0.20%.

More Losses to Come?

Even though the Pound did everything to reach a new 5-months high, the overhead resistance was able to hold steady. The way Sterling was rejected by the $1.32 barrier must be concerning for those betting to the upside. With multiple technical indexes estimating that the GBP/USD trading pair is poised to retrace, the chances for a downturn are currently high.

In the event of a downswing, investors must pay close attention to the $1.301 support level. This price hurdle poses a lot of significance to the Pound’s uptrend. Staying above it increases the odds for another upswing towards the $1.32 resistance.

However, moving past it may trigger panic among investors. An increase in the selling pressure behind Sterling could see it drop towards $1.281 or even $1.272.

Given the ambiguity the Pound presents, traders must pay close attention to the $1.301 support level. The strength of this supply barrier will determine where GBP is headed next.

For a look at all of today’s economic events, check out our economic calendar.

Konstantin Anissimov, Executive Director at CEX.IO

Saudis, Iraqis Keeping Crude Oil Prices Relatively High

Crude oil traders traded cautiously into the weekend on the back of rising tensions between the worlds’ leading economies.

Although crude prices recovered, on impressive U.S Jobs report data, crude oil traders were unable to keep their gains because of growing global geopolitical uncertainty.

Brent Crude still remains below the $45 resistance level with an upward move being capped by concerns about the pace of the post-COVID-19 economic recovery.

However, Crude oil bulls are ramping up their long bets because the Saudis (OPEC’s largest producer of crude oil), for the second time in three years, are curbing the amount of crude it sends to the world’s largest economy in an attempt to stabilize crude oil prices and hasten the rebalancing of supply and demand in the present fragile energy market.

Still, crude oil traders remain relatively bullish in the short term, on OPEC unwavering compliance commitment, reaffirmed when the Saudis and Iraqi energy ministers made a joint statement, stating that they are fully committed in complying with OPEC+ present agreement.

Crude oil traders in the mid-term will be focused on August 15 trade talks, which surround primarily on China’s energy imports. Any signs of conflicts in the lead up to this discussion could make a strong case for crude oil bears, pushing Brent crude price around the $40 support level or lower.

Outside the rising tensions between US-China, which is expected to be a norm between now and November the primary concern for crude oil traders still remains the rising COVID-19 caseloads ,the main macro affecting energy demand.

For a look at all of today’s economic events, check out our economic calendar.

Turkish Lira’s Plunge Throws Institutional, Economic Challenges Into Sharp Focus

Scope Ratings has ranked Turkey as among its “Risky-3” out of a sample of 63 economies most at risk of a balance of payments crisis, given the lira’s history of significant volatility and the high proportion of government and private sector debt denominated in foreign currencies.

The rating agency downgraded Turkey’s credit ratings to B+ from BB- on 10 July to reflect growing risks to external sector stability and deterioration in the governance framework including risks stemming from long-run foreign-exchange reserve depletion. The lira trades presently 33% below an August 2019 peak against the dollar. The Turkish currency also hit fresh all-time lows against the euro this past week, before making up some losses after evidence of policy tightening.

Early signs of reversal in the direction of policy tightening, but unlikely enough

Friday’s closure of the one-week repo financing window forces central bank funding of banks to the costlier overnight window – an effective 150bp hike. Next, regulators are expected to ease an unorthodox “asset ratio”, effective since 1 May, which has compelled lenders to raise lending activities unsustainably. Lira lending from the consolidated banking system rose 45.9% YoY as of July. The banking supervisor this week, moreover, announced easing of some rules that restrict foreign banks from access to lira liquidity, under strict conditions in regard to the use of such liquidity.

“So, we’ve now sort of returned to the 2018 lira crisis response playbook of backdoor rate hikes via shifting funding between central bank windows, to avoid unwanted attention for central bankers from President Recep Tayyip Erdoğan were policy rates themselves hiked, whilst, moreover, easing foreign exchange reserves deficits via funding from foreign sources like Qatar,” says Dennis Shen, lead analyst on Turkey at Scope. “Unfortunately, what ultimately eased the crisis in 2018 more tangibly was a return towards conventional policymaking and a significant hike in the policy rate itself.”

“In consideration of elevated inflation of 11.8% in July, Turkey’s real policy rates remain among the world’s lowest. However, a rate hike will not be straight-forward given politicisation of the central bank and interventions from the President, who has a stated preference for low rates. A significant rate hike would be helpful in stabilising current exchange rate devaluations; however, tightening would also come at some price to Turkey’s fledgling economic recovery.”

The lira’s recent weakness against the dollar and other major currencies comes even as global risk sentiment has improved since a March ebb, which should otherwise support emerging market currencies.

Lira’s decline exacerbates macro imbalances

“Deterioration in the value of the lira not only raises inflation, but also undermines debt sustainability given 50% of Turkey’s central government debt denominated in foreign currency, up from 27% in mid-2013,” says Shen.

“Any sustained deterioration in the exchange rate can spiral increasingly easily into a problem for the government’s future servicing capacity of its public debt,” Shen says.

Turkish general government debt is set to rise to more than 40% of GDP this year, up from a comparatively low 28% in 2017. Non-financial companies have a significant net foreign currency debt position of USD 165bn as of May 2020.

The impact of the Covid-19 pandemic in curtailing Turkey’s income from travel and tourism receipts impairs private sector foreign exchange reserve liquidity as well as the current account – the latter which returned to a deficit of just above 1% of GDP in the year to May 2020.

Inadequate foreign exchange reserves have been diminished further

Ankara has diminished what were already inadequate foreign currency reserves this year in trying to defend the exchange rate. Gross official reserves (including gold) fell to USD 90.2bn as of 31 July, compared with USD 105.7bn at the start of 2020.

“However, we need to net out central bank foreign-exchange liabilities to domestic banks and, importantly, bilateral short-term foreign-exchange swap liabilities.”

FX swaps stood at a record high USD 54.4bn at end-June as the central bank has entered such arrangements with domestic financial institutions, including state-owned banks, to artificially elevate gross reserve levels. Swap-corrected net reserves declined to a record low of negative USD 32.5bn in June, a turnaround from positive USD 18.8bn at end-2019 and USD 56.0bn at a 2011 peak.

“Absent the roll-over of such swap arrangements, the country’s reserves are negative – in other words, Turkey’s balance of payments is precarious unless the country’s underlying economic and external sector weaknesses are swiftly corrected,” says Shen.

For a look at all of today’s economic events, check out our economic calendar.

Dennis Shen is a Director in Sovereign and Public Sector ratings at Scope Ratings GmbH. Matthew Curtin, Senior Editor of Economic Research at Scope, was a contributing writer for this comment.

Euro Area Safe Assets to Rise by Almost EUR 2.5trn Over Coming Years, Boosting the Euro’s Standing

The European fiscal response to the Covid-19 crisis – including national and EU-wide counter-cyclical fiscal stimulus – will indeed increase the availability of euro-denominated safe assets in coming years by almost EUR 2.5trn, an increase of about 50%.

“We expect the combined national and European fiscal response to the Covid-19 shock to increase the availability of highly rated euro-denominated securities from around EUR 5trn in 2019 to almost EUR 7.5trn by 2024,” says Alvise Lennkh, deputy head of sovereign and public sector ratings at Scope.

“The scarcity of euro-denominated safe assets particularly relative to the depth of the markets for US Treasuries and Japanese government bonds has been on the academic and political agenda since the global financial and sovereign debt crises,” says Lennkh.

“The coming significant jump in issuance, which will result in higher public debt levels overall, may boost the euro’s credentials as a global reserve currency,” he says.

Two drivers for the increase in euro-denominated safe assets

There are two main drivers for the increase in euro-denominated safe assets:

  • An estimated increase in debt securities by highly rated sovereign governments by around EUR 1.6trn, driven by France (~EUR 700bn) and Germany (~EUR 600bn); and
  • Issuance at the supranational level, particularly from the European Commission, will increase significantly to fund the “Next Generation EU” recovery plan (EUR 750bn) and the SURE unemployment scheme (EUR 100bn) over the coming years.

Much higher levels of government and supranational debt are to be expected, albeit financed at lower cost, mostly driven by the ECB’s crisis response, which will result in greater interdependence between the ECB and euro area member states given the increasing share of sovereign bonds on the ECB’s balance sheet.

In addition, the greater supply of euro-denominated area safe assets, particularly those issued by the EU, could address some of the adverse effects resulting from the shortage of safe asset supply in the euro area, notably banks holding large portions of domestic sovereign bonds on their balance sheets, which could now diversify some of their sovereign bond holdings, possibly reducing the vicious so-called doom loop in sovereign debt crises.

Benefits should, however, not be overstated at this stage

However, the benefits should not be overstated at this stage as EU issuance amounts only to slightly above 5% of EU-27 GDP. Still, having a deeper pool of euro area safe assets may affect sovereign creditworthiness in various ways.

“A sufficiently high supply of highly rated euro-denominated bonds would facilitate integration between the still-fragmented financial systems and ensure liquid markets for refinancing.”

Implications of enhanced reserve currency status for euro area sovereigns include the prospect of more limited exchange-rate risks and reduced government borrowing costs, and thus the ability to increase spending without materially raising debt-sustainability concerns.

For a look at all of today’s economic events, check out our economic calendar.

Read the full Scope Ratings report at this link.

Alvise Lennkh is the Deputy Head of Sovereign and Public Sector ratings at Scope Ratings GmbH.

Ireland: Covid-19 Crisis Weighs upon Growth and Fiscal Metrics, but Robust Recovery Expected

Ireland has experienced severe health and economic crisis but has responded forcefully, including prompt and stringent restrictions of economic activity from 27 March followed by a staggered re-opening of its economy. The formation of Ireland’s first grand coalition government – between Fianna Fáil and Fine Gael after the February elections – has created a more predictable political climate.

“The political breakthrough should help Ireland navigate through this severe global health crisis, including the risk of a second wave of coronavirus incidence in Europe in the 2H-20, and engineer a robust economic rebound,” says Dennis Shen, lead analyst at Scope Ratings for Ireland.

Significant economic contraction in 2020, but robust 2021 rebound

The Irish economy grew by 1.2% QoQ in Q1 2020, although the true economic barometer for 2020 is Q2, a quarter during which output is expected to have contracted significantly. Scope Ratings forecasts a real output contraction of around 7% for the full-year 2020, as the Irish economy entered recovery after April troughs, a milder forecast than European Commission expectations for a 7.9% contraction in 2020.

“The coronavirus-related demand and supply shock has curtailed output in Ireland’s domestic consumer-oriented sectors such as retail, real estate, construction, entertainment, transport and hospitality, while the financial sector, industry – including the important pharmaceuticals sector – and the information and communications technology sector have been more resilient,” says Shen.

In 2021, Scope forecasts a sturdy economic rebound of around 7.5%.

Debt ratios to rise significantly this year, but resume a downward trajectory post-crisis

The government has announced fiscal support of about EUR 18.5bn, equivalent to 5.5% of GDP, since the start of the crisis, including income support, healthcare and investment spending, grants for small and medium-sized enterprises, tax cuts and payment holidays, and credit-guarantee schemes. After the announcement of the July stimulus package, the Irish National Treasury Management Treasury estimates total bond funding activity this year will be at the upper end of a range of EUR 20bn to EUR 24bn, over 80% of which has been financed via long-term bond issuance already, with an average issuance maturity of above 11 years.

“We expect Ireland’s public debt stock to rise to around 70% of GDP this year, having declined to less than 58% of GDP in 2019,” says Shen. “The rise in debt this year does return Ireland to ratios of debt per 2016 or 2017.”

“However, we expect the debt ratio to return on a sustained downward trajectory post-crisis, reaching 66% of GDP by 2024, given the economy’s strong growth potential, supported by increases in the working-age population of an estimated 0.9% a year alongside steady improvements in productivity,” says Shen. The current government is, moreover, expected to take action to reduce budget deficits post-crisis.

“However, public debt compared with the underlying Irish economy – as measured by debt to modified GNI – is significantly more elevated. Under this alternative metric, public debt is expected to increase in 2020 to around 120% of modified GNI – justifying the government’s continued attention on ensuring fiscal consolidation after the crisis.”

Highly accommodative financing rates continue to support Ireland’s capacity to lower public debt over the medium run. Ireland can borrow at a 10-year yield of -0.12% at time of writing – equal to a spread of 39 bps over Germany.

In addition to coronavirus risk, legal and tax certainty and Brexit are risks

“The recent ruling of the EU General Court against the earlier European Commission decision to make Apple pay to Ireland EUR 14.3bn or 4.4% of GDP in back taxes and interest does impact government assets and, as such, net debt levels, pending the outcome of any Commission appeal to the European Court of Justice,” says Shen. “At the same time, the ruling may hold medium-run consequences as well including greater tax certainty for US multi-nationals with operations in Ireland.”

“Brexit remains another risk,” says Shen. “The impact of a year-end no-deal UK exit from the EU single market and customs union, even though it is not an outcome that we’d expect, would weigh upon Ireland’s economic performance.”

In late June, Ireland’s political parties agreed on a three-way grand coalition, made up of the centre-right parties, Fianna Fáil and Fine Gael, alongside the Green Party, the first such coalition since the Irish independent state’s founding in 1922. The coalition government’s priorities include the addressal of a housing shortage and homelessness, an overhaul of healthcare, and achievement of ambitious climate-change objectives.

For a look at all of today’s economic events, check out our economic calendar.

Dennis Shen is a Director in Sovereign and Public Sector ratings at Scope Ratings GmbH.

Dollar Bounces, Gold Slips, while Equities Hold Their Own

In the emerging market space, the liquid and accessible currencies, like the Turkish lira, Mexican peso, and Russian rouble, are down the most. The lira has fallen 1% after intrasession volatility that pushed it to a record low against the euro yesterday. That seems to be the source of the pressure on the lira against the dollar.

The South African rand is among the weakest among emerging market currencies today even though the IMF approved a $4.3 bln loan, the most granted so far to assist in combatting the virus. Despite the correction in the foreign exchange market, equities are mostly firm. In the Asia Pacific region, only a few markets could not sustain gains.

Japan, Taiwan, and Australia were among them. South Korea led the region with a nearly 1.8% gain. Europe’s Dow Jones Stoxx 600 is up almost 0.5% after falling for the past two sessions (~2%). US shares are little changed. US bond yields backed up yesterday, with the 10-year yields popping back above 60 bp. This exerted upward pressures in Asia and Europe. Gold reached $1981 before the profit-taking pushed it to about $1907 from where it is recovering. September WTI is little changed around $41.50 a barrel.

Asia Pacific

China is resorting to local lockdowns to combat the new outbreak in the virus. The 61 cases reported Monday were the most in four months. Separately, New Zealand became the latest country to suspend the extradition treaty with Hong Kong. That means that of the intelligence-sharing Five Eyes, only the US has not done so, though it has threatened to do so.

India has banned almost 50 Chinese apps to largely check the workaround the 59 apps banned last month. Another 250 apps are under review. India has cited threats to user privacy and national security. This is a new front in the confrontation with China. The US and Japan are considering their own bans on some Chinese apps.

The dollar is in a quarter of a yen range on either side of JPY105.45, as it is confined to yesterday’s range. The upside correction does not appear over, and the greenback could test previous support and now resistance near JPY106, where an option for $600 mln expires today (and a $1.8 bln option expires Thursday).

The Australian dollar is little changed as it moves within the $0.7065-$0.7180 range that has confined it for around a week now. It has held above $0.7115 today, but it may be retested. The PBOC set the dollar’s reference rate at CNY6.9895 today, nearly spot on where the models suggested. After falling to a four-day low near CNY6.9870, the dollar recovered back above CNY7.0. China seems intent on not allowing the US to get an advantage by devaluing the dollar, something that President Trump has advocated. A stable dollar-yuan rate in a weak dollar environment means that the yuan falls against the CFETS basket. Against the basket, the yuan is at its lowest level in a little more than a month.

Europe

News from Europe is light and the week’s highlights which include the first look at Q2 GDP (median forecast in the Bloomberg survey is for a 12% quarterly contraction), June unemployment (~7.7% vs. 7.4%), and the first look at July CPI (median forecast is for a 0.5% decline for a 0.2% increase year-over-year) still lie ahead.

Today’s focus is mostly on earnings and bank earnings in particular. European banks are being encouraged to extend the hold off of dividend payout and share buybacks that were first introduced in March. This may be worth around 30 bln euros. The UK is fully aboard too. In terms of loan-loss provisioning, European banks are expected to set aside around the same amount as they did in Q1, which was about 25 bln euros. In comparison, the five largest US banks have added a little more than $60 bln in the first half to cushion sour loans.

Fitch lowered its five-year growth potential for the UK from 1.6% to 0.9%. It also took EMU’s potential to 0.7% from 1.2%. This could weaken the resolve of asset managers, where industry surveys suggest a desire to be overweight European stocks and the euro on ideas of economic and/or earnings outperformance. That said, the number of analyst upgrades has surpassed the number of downgrades in Europe for the first time this year.

The euro reached $1.1780 yesterday. As the momentum stalled in Asia, some light profit-taking has been seen that saw it briefly dip just below $1.17 in early European turnover. Intraday resistance is seen near $1.1740-$1.1750. In the recent move, the session high has often been recorded in North America, and we’ll watch to see if the pattern holds today. The market may turn cautious ahead of tomorrow’s outcome of the FOMC meeting.

Sterling poked above $1.29 yesterday for the first time in four months. It made a marginal new high today (~$1.2905), but it too is consolidating. Support is seen in the $1.2830-$1.2850 area. As the euro was trending higher against the dollar yesterday, it also rose to about CHF1.0840, its highest level here in July. However, today’s consolidation has seen the euro slip back to around CHF1.0775. Look for it to find support above CHF1.0760.

America

The US reports house prices, Conference Board consumer confidence, and the Richmond Fed’s July manufacturing survey. Even in the best of times, these are not the typical market movers. The focus instead is three-fold: corporate earnings (today’s highlights include McDonald’s, Pfizer, and 3M), the negotiation over the fiscal bill, and the start of the FOMC meeting. Canada has not economic reports, while Mexico’s weekly reserve figures are due. It continues to gradually accumulate reserves. They have risen by about 4.5% this year after a 3.5% increase last year.

The Economic Policy Institute estimates that a cut in the $600 a week extra unemployment insurance to $200 a week will reduce aggregate demand and cut the number of jobs that were projected to be created. It expects a loss of about 2.5% growth and 3.4 mln fewer jobs. After this week’s FOMC meeting and the first look at Q2 GDP, the US July employment report is due at the end of next week.

It is one of the most difficult high-frequency economic reports to forecast. Still, the outlook darkened after last week’s increase in weekly initial jobless claims, which covered the week that the non-farm payrolls survey is conducted. Another increase, which is what the median forecast in the Bloomberg survey expects, is only momentarily going to get lost in the excitement around the GDP report.

The relatively light news day allows us to look a little closer at Mexico’s June trade data that was out yesterday. Mexico reported a record trade surplus of $5.5 bln. Yet, it is not good news. Mexico is hemorrhaging. The IGAE May economic activity index, reported at the end of last week, showed a larger than expected 22.73% year-over-year drop. The 2.62% decline in the month was nearly three times larger than economists forecast. With the virus still not under control, the government’s forecast for a 9.6% contraction this year is likely to be overshot. The record trade surplus was a function of a larger decline in imports (-23.2%) than exports (-12.8%).

Auto exports are off more than a third (34.6%) this year, to $47.5 bln. Other manufactured exports are down 3.4% to $113.8 bln. Petroleum exports have fallen by nearly 42% in H1 to $8.0 bln. Agriculture exports edged up by 7.3% to $10.5 bln to surpass oil. The peso’s strength reflects not the macroeconomy but its high real and nominal interest rates in the current environment. Yesterday, the dollar fell below MXN22.00 for the first time this month. The June low was near MXN21.46.

The US dollar initially extended its losses against the Canadian dollar, slipping to CAD1.3330, just ahead of last month’s low (~CAD1.3315) before rebounding to almost CAD1.3400. The upside correction could run a bit further, but resistance in the CAD1.3420-CAD1.3440 area may offer a sufficient cap today. The greenback found support against the Mexican peso near MXN21.90 and bounced back to around MXN22.07. Resistance is seen near MXN22.20. The peso is up about 4.5% this month, but within the region has been bettered by Chile (~+6.75%) and Brazil (~+6.15%). The Colombian peso’s almost 2..2% gain puts it in the top 10 best performing emerging market currencies so far this month.

For a look at all of today’s economic events, check out our economic calendar.

Dollar Slide Continues, while Gold Soars

Emerging market currencies are fully participating, with the JP Morgan Emerging Market Currency Index posting its fifth gain in six sessions. The greenback’s retreat appears to have become decoupled with the equity market. The yen’s strength, for example, had a limited impact on Japanese shares, which were narrowly mixed, with the Topix rising and the Nikkei falling.

Asia Pacific bourses were mixed, though most of the large ones, including China, South Korea, Australia, and Taiwan advanced. Note that the shake-up in the chip space that saw Intel shares crushed at the end of last week lifted Taiwan Semiconductor Manufacturing Company up 10% and helped the Taiex rise 2.2%. European stocks were struggling, but the better than expected German IFO helped equities recover. US equities are trading higher after the S&P 500 posted back-to-back losses at the end of last week for the first time this month. Bond markets are also mixed.

The European core is doing better than the periphery, but yields are +/- 2 bp. The US 10-year is near 57 bp. Gold is rallying for the seventh consecutive session at around $1944 is at new record levels. Its 2% gain is the most in three months. Oil, on the other hand, is little changed with the September WTI contract trading quietly around $41 a barrel, inside the pre-weekend range.

Asia Pacific

Japan reported it May All Industries Activity Index fell 3.5% in May after the April reading was revised to -7.6% from -6.4%. This is like a proxy for GDP. While the US and EMU report Q2 GDP this week, Japan’s first estimate is not due until the middle of next month. Separately, the May Leading Index was revised lower (to 78.4 from 79.3) but still held on to a small gain from April’s 77.7.

Hong Kong’s imports and exports recovered in June, but not by as much as had been hoped. Exports fell 1.3% from a year ago, a 7.4% slide in May. Economists had project outright growth. Imports fell 7.1% from a year ago. Economists had expected that May’s 12.3% slump would have been halved. The net result was an HKD33.3 bln deficit. Of note, Hong Kong’s exports to China rose 8.8% from a year ago, while its exports to the US were 21.4% below a year ago (-14.4% in May). Exports to Taiwan were also stronger. Exports to Europe were weaker.

Helped by the economic recovery and government infrastructure spending, China reported June industrial profits rose 11.5% year-over-year, following May’s 6% improvement. Still, profits were off 12.8% in H1 from a year ago. Private sector and foreign businesses trailed in the profit-recovery, underscoring the role of state-owned enterprises. Although the manufacturing sector led the rebound in the PMI to be released at the end of the week, it is the service sector that appears to be recovering quicker.

The dollar was sold through JPY106 before the weekend while Tokyo was on holiday. The market was cautious and took it back to JPY106 at the close. Japanese traders sold the dollar back off to around JPY105.45 before Europe entered the fray and has kept it in a narrow range near its trough, awaiting the US market leadership. Initial resistance is seen near JPY105.70. The Australian dollar is firm near $0.7120.

It reached a high last week, closer to $0.7180. The intraday technicals suggest it is poised to move higher in North America today. The PBOC set the dollar’s reference rate at CNY7.0029, which was stronger than expected, and the yuan snapped a three-day decline. The greenback finished the mainland session near its reference rate.

Europe

The German IFO survey lent credence to the improvement seen in the preliminary PMI before the weekend. The current assessment rose to 84.5 from 81.3. It is the best since March. The expectations component improved to 97.0 from 91.6, its best since November 2018. This lifted the assessment of the overall business climate to 90.5 from 86.3. It has not been this high since January.

The idea that Europe is outperforming the US is so far limited to some recent PMI surveys and may be vulnerable to the new flare-up in Covid-19 in several countries, including Spain and France. The divergence is unlikely to be reflected in this week’s first estimate of Q2 GDP. The eurozone contracted by 3.6% quarter-over-quarter in Q1 and is expected to have shrunk by another 12% in Q2. The US contracted by 5% at an annualized pace in Q1, which is about 1.2% quarterly. The median forecast for Q2 GDP in the Bloomberg survey is for a 35% annualized decline, which is about 7.8% on a quarterly basis.

The EU debt issuance under the Recovery Plan is embraced by some as the Hamiltonian moment. We recognize its potential but are reluctant to extrapolate to a fiscal union from what could be one-off emergency measures. We have suggested it could be scaffolding but that the building of the greater union is still in the distant future. Bundesbank President Weidmann cautioned that while he endorsed the action, it should not serve as “a springboard for large scale EU debt for regular household financing.” He emphasized the temporary nature of it, and urged a control mechanism to ensure the funds are spent “wisely and efficiently.”

The euro’s run higher is being extended for the 10th session of the past 11. It has fallen once since July 9. Today’s push in the Asia Pacific timezone saw $1.1725 before consolidating and easing to almost $1.1680 in the European morning. This pullback may provide a better buying opportunity for North American dealers who have been consistent dollar sellers in the run. Sterling is bid as well and has moved above last month’s high (~$1.2815) to rise to its best level since March (~$1.2860). Support now is seen near $1.2800. Meanwhile, the euro, which had tested the GBP0.9000 area last week, tested the upper end of this month’s range near GBP0.9140.

America

The US reports June durable goods orders today and the Dallas Fed’s manufacturing survey. The manufacturing and housing market seems to be leading the US recovery, and this is expected to be evident in today’s reports. Headline durable goods orders are expected to have risen by around 7% after the 15.7% gain in May.

However, the May report was bolstered by defense and aircraft orders. Excluding these, June orders will likely be stronger than May’s 1.6% increase. The report may help economists fine-tune their forecasts for Q2 GDP, which is released later this week. Of course, the FOMC’s two-day meeting, which concludes Wednesday, is the other main highlight of the week.

The moratorium on evictions from federally-backed rental properties enshrined in the CARES Act came to an end over the weekend. The landlords can give tenants a 30-day notice to vacate the premises. Prior to the passage of the moratorium, federally-backed apartment buildings accounted for a third of eviction cases.

The $600 a week extra unemployment insurance is set to expire at the end of the week. Some Republicans are pushing for an employment bill to be passed this week, which would tie the extra compensation to the previous pay, capping it at around 70%, according to press accounts. Part of the problem, and why this approach was previously rejected, is the logistical challenge that may prove to be beyond the capacity of many states to properly implement.

At just below 59 bp, the 10-year posted its lowest weekly close in history. The 10-year real yield closed at a record low of minus 92 bp. A dovish FOMC statement is expected amid the mounting virus cases and the escalation of US-China tensions, as officials prepare for additional measures as early as September. Unlike a year ago, the US-China tensions are not being spurred by rounds of tariffs but geopolitics. In fact, it appears that China has stepped up its purchases of US agricultural products in recent weeks.

The US dollar bears have their sights set on last month’s low near CAD1.3315. The greenback was sold through CAD1.34 last week but straddled the area in the previous two sessions. The Canadian dollar often lags behind the other major currencies in moves against the US dollar. The CAD1.3400 area should offer initial resistance, and a move above CAD1.3450 would likely squeeze the greenback shorts.

Mexico reports its June trade balance today. It is expected to return to surplus after two months of large deficits (~$3.5 bln). The dollar is trading a little above this month’s lows (~MXN22.1550). A break could see MXN21.90-MXN22.00. The peso’s strength is not so much a reflection of its domestic economic situation as much as it is about the broader risk appetites and its high real and nominal rates.

For a look at all of today’s economic events, check out our economic calendar.

Middle-Week Screening. Seesaw on the Market. Silver and Alibaba are for long; Boeing is for short

Overview and trends

Across the pond, according to Reuters, European Union leaders did not reach solidarity on a coronavirus stimulus plan on Sunday, German Chancellor Angela Merkel said as marathon negotiations ran into a third day and acrimony mounted over the demands of rich but thrifty countries.

On Monday U.S. officials including Senate Majority Leader Mitch McConnell and Treasury Secretary Steven Mnuchin met in the White House to discuss another coronavirus stimulus package. Mnuchin reiterated he wanted to put a cap on spending to about 1 trillion dollars, well below House Speaker Nancy Pelosi’s $3.5 trillion relief plan. He also said the bill will focus on “kids and jobs and vaccines.” Meantime U.S. stocks were higher Monday as Wall Street came off its third straight week of gains and investors turned were busy analyzing more earnings reports including those from Halliburton and IBM (the latter beat estimates by a wide margin and added over 3% in post-market).

Yesterday stocks closed mostly higher on Wall Street Tuesday despite a final hour hiccup that nearly wiped out the market’s gains for the day. The S&P 500 added less than prominent 0.2%, after culminating as much as plus 0.8%. Banks, telecoms and energy stocks led the gains, offsetting mounting losses in technology stocks – something every smart investor must take seriously in the wake of more big techs’ like Apple, Amazon and Microsoft earnings underway – which pulled the Nasdaq index lower.

Oil prices joined precious metals’ extravaganza and rose, reaching the highest levels since March. West Texas Intermediate crude gained more than 3%, to 41 dollar 88 cents per barrel. Brent crude, in its turn, rose almost 3%, to 44 dollars 30 cents per barrel, at the U.S. market close.

Most investors wait as a savior for more financial stimuli from big governments and central banks to prop up stocks and bonds that are slowly losing steam.

Seemingly in response to that urge, many governments have already announced large amounts of additional fiscal support to keep tackling the pandemic. But S&P Global Ratings suggests that some countries, including the U.S., have shown “a degree of fiscal fatigue”. The problem is that additional spending will worsen the governments’ balance sheets, but they are still necessary to “prevent things from getting even worse.”

S&P Global Ratings earlier this month downgraded its forecast for the global economy. The agency now expects global GDP to shrink by 3.8% this year — worse than the 2.4% contraction it previously projected. So the central banks and governments really have little choice but to move on.

The end of the coronavirus pandemic could bring a large number of new asset managers. Recently published data from a research firm called eVestment showed that the number of new investment firm launches substituting some less lucky rivals tends to spike following economic crises.

Here’s why, according to data firm: As markets contract, asset management employees may be laid off. Instead of seeking out a new job, they start their own firms. Additionally, some of these employees leave their jobs voluntarily, with the goal of taking a new investment approach presented by market turmoil.

Conclusion: in order to survive hard times, one needs to be open to new trends and must possess the skill of distinguishing between winning and losing assets.

Trading ideas

Silver futures logged the highest finish in nearly 4 years at the beginning of the week, buoyed by expectations for further central bank stimulation that destroy the value of world major currencies and as the rise in global COVID-19 cases continues to threaten the economic recovery. September silver added almost a dollar, or 4.9% since July 17, to settle at $20.21 an ounce, the highest front-month contract finish since August 2016. Silver is known to be more choppy and volatile precious metal as compared to gold. But this year its uncharacteristic trade smoothness since mid-March leaves its older sister gold’s parameters derailed.

Alibaba’s affiliate company Ant Group, operating the mobile payment service Alipay, reportedly started the process of its initial public offering on the Hong Kong Stock Exchange and Shanghai’s Nasdaq-style STAR market simultaneously. In China Alipay is much more prominent than the namesake portal (alibaba.com) of Alibaba Group. Ant was previously valued at $150 billion after its last funding round in 2018, making it the world’s most valuable start-up.

Reportedly, Ant generated about 120 billion yuan or $17.1 billion dollars in revenue and nearly 17 billion yuan or $2.4 billion dollars in net profit last year. This is very good news for Alibaba stock which rose over 50% since April. Its earnings reporting day is scheduled for August 13, so there is plenty of time to judge this event keeping the stock in the portfolio.

Boeing’s reputation remains under siege even after the much-advertised test flight of Boeing 737 MAX couple of weeks ago. The company was forced to release a catastrophically damning set of documents to congressional investigators last week that included “conversations among Boeing pilots and other employees about software issues and other problems with flight simulators” for the 737 Max, the plane involved in two fatal crashes. The messages further complicate Boeing’s tense relationship with the Federal Aviation Administration, which can’t be satisfied to read the disdain with which Boeing treated the civil aviation regulators.

After the undisclosed outcome test flight, the Boeing share edged up almost 6.5% to $176, but its quarterly earnings date of July 29 will be Boeing’s judgement day, because there is nothing to cheer up its shareholders with. The company reported net loss of $5.72 a share in the previous quarter, which is expected to further deepen this time around, so Boeing is a definite short, which will be easy to cover at a profit thereafter.

For a look at all of today’s economic events, check out our economic calendar.

By Vladimir Rojankovski, Grand Capital Chief Analyst

EU Budget and Recovery Fund Deal: a Significant Step to Boost Europe’s Integration and Recovery

Scope Ratings’ Alvise Lennkh, deputy head of the sovereign and public sector group, reviews the new EU budget deal.

1. What does the outcome of the EU budget deal mean for Europe?

First, politically, it is a very important signal that leaders agreed – already in the first month of the German EU Presidency – on the budgetary resources and objectives to facilitate Europe’s recovery from 2021 on. Once again, European leaders have demonstrated that in times of distress, compromise and action are possible, not only to tackle an emergency, but also to support a more robust recovery. This decision sets a confidence-building precedent that extraordinary financial measures are available from the EU to cushion against future economic and social shocks.

Secondly, economically, the potential for a more durable recovery has been strengthened. The EU’s recovery fund is the first significant common European counter-cyclical fiscal response to an economic crisis, to be comprised of EUR 390bn in grants and EUR 360bn in loans, financed by bond issuance backed by the EU budget, which comes on top of EUR 1.1trn via the next seven-year budget, bringing a total budget size of EUR 1.8trn. However, the macro-economically relevant element for Europe’s recovery in terms of additional fiscal stimulus relates predominantly to the recovery fund. At EUR 750bn, the fund is slightly above 5% of EU-27 GDP, assuming that all grants and loans are disbursed.

The direct fiscal stimulus will mostly derive from the grants, which will be committed, on average, at around EUR 130bn a year between 2021-2023. The resulting additional stimulus amounts to near 1% of EU GDP per year – although the actual impact is likely to be somewhat lower as some commitments may only be disbursed after 2023. Still, a productive use of such grants, supported by careful project and investment selection as well as appropriate reforms in the context of the European Commission (EC)’s Country Specific Recommendations, could facilitate a faster and more even economic recovery.

Third, geopolitically, and longer term, the European Commission’s significant increase in capital market borrowing of up to EUR 750bn will increase the availability of safe assets denominated in euros, which could further support the safe-haven role of the euro in the global financial system.

2. How significant is the agreement on the EU budget in the context of Europe’s forceful and evolving policy response to the impact of Covid-19 on EU economies?

The decision critically shifts the focus from emergency measures adopted over recent months to Europe’s recovery over coming years. While the first measures provided a safety net for sovereigns and corporates, which avoided the near-term risk of any immediate liquidity crisis, the deal on the recovery fund and the EU budget provides important longer-term growth incentives.

In addition, the agreement underlines the important coordination of fiscal and monetary policies in Europe, setting a precedent for future crisis response at the EU level. Additional steps toward the completion of the banking and capital markets unions will also be key to facilitating an even and sustainable economic recovery in the EU, which will enhance the EU’s global economic and political objectives as well as the attractiveness of euro-denominated assets.

3. The deal for the Recovery Fund is the result of tough negotiations and includes a number of compromises. What are the key political implications?

The hard-fought negotiations highlighted significant divisions within the EU between more “frugal” northern countries and the southern countries. As a result, the deal includes a number of important compromises such as an increase in budget rebates for some northern countries and the adoption of an ‘emergency brake’ mechanism, which allows any individual member state to oppose disbursement of recovery monies, requiring then a decision by EU finance ministers and, in case of disagreement, by the EU Council.

Such a governance structure may postpone payments in the case of non-productive usage of recovery fund resources, reinforcing the incentives to allocate the Recovery Fund’s resources for projects related, for example, to addressing climate change and the digital economy.

In addition, leaders have also agreed on the implementation of additional European-wide taxes, including on non-recycled plastic waste (effective January 2021), a carbon border adjustment mechanism and on a digital levy (both to be effective January 2023). As the proceeds will be used for early repayments of the forthcoming EUR 750bn in borrowings, these new instruments could, depending on final design and implementation, gain in importance over time, underpinning the joint nature of this fiscal effort.

Overall, we believe that the negotiations highlighted the willingness and ability among EU leaders to reach an agreement. We expect the parliamentary ratification process, including that by the European Parliament, to be completed by end-year with the Recovery Fund becoming operational in 2021.

4. What is the impact of the deal for Central and Eastern Europe (CEE) and Southern Europe?

CEE economies, alongside economies in southern Europe, are key beneficiaries – economically and from the perspective of debt sustainability.

First, both regions have been the largest beneficiaries of EU funds relative to their economic size in the EU budget of 2014-20, with EU funds accounting for more than half of all public investment in many economies. The Next Generation EU fund and EU Budget for 2021-27 present an opportunity for such countries as budget allocations remain large – and in some cases have even increased – which can facilitate a recovery in the coming years. While the ‘regime of conditionality’ still needs to be introduced, going forward, in case of breaches of the rule of law, measures can be taken by the Council on the basis of a qualified majority as opposed to unanimity. This change in governance alone may incentivise all member states to avoid any such procedure related to the adherence to the rule of law.

However, the ability for such economies to deploy additional EU funding will be crucial. EU fund absorption rates vary markedly among CEE and southern European countries, reflecting variation in the co-financing capacity of governments as well as institutional factors such as governance quality and long-term planning capacity, the control of corruption and the extent of decentralisation. For example, the cumulative absorption rate of 2014-20 EU funds is currently well above 50% in the Baltic countries and Poland, but only around 40% on average in Italy, Spain, Romania, Croatia and Bulgaria.

Secondly, the EC loans are highly concessional with lower interest rates and longer maturities compared to what governments could in many cases issue on their own. This will positively impact government debt sustainability over the medium term. Under the Recovery Fund, EU members can borrow up to 6.8% of gross national income, or about EUR 120bn in the case of Italy and EUR 85bn for Spain.

5. What impact will this agreement have on European sovereign ratings?

Sovereign credit rating outlooks from Scope depend on a complex interplay of monetary, fiscal and economic factors, including the social and political repercussions of this pandemic. We acknowledge that decisions on the EU budget and recovery fund are supportive regarding EU sovereign ratings and form a good opportunity to facilitate and support Europe’s economic recovery and transformation in 2021 and beyond alongside continuing the enhancement of the overall EU economic architecture.

Still, we will assess individual sovereign government credit profiles selectively to account for varying fiscal adjustment capacities and underlying degrees of economic resilience and abilities to absorb and reverse the significant economic and fiscal impact from this shock over the medium term.

For a look at all of today’s economic events, check out our economic calendar.

Alvise Lennkh is the Deputy Head of Sovereign and Public Sector ratings at Scope Ratings GmbH.

EU Rescue Fund Remains in Focus, Markets Calm

Not much was achieved at the European meeting on Friday, and that wasn’t exactly a surprise. The €750 billion rescue package was at the centre of the talks, and the original proposal was that €500 billion would be allocated as grants, and that €250 billion be distributed as loans.

The Netherlands, Austria, Sweden and Denmark, expressed opposition to €500 billion being allocated as grants without conditions. There were concerns that funds wouldn’t be used to tackle the health crisis. The countries in question, have been dubbed the ‘frugal four’, and they also called into question the size of the proposed grants, as they would prefer to see a higher percentage of loans.

Talks continued over the weekend. In a bid to win over the ‘frugal four’ it was suggested that €400 billion be dished out as grants rather than €500 billion. It was reported The Netherlands and Austria are pushing for €390 billion in grants, and €360 billion in loans, but nothing has been agreed upon yet. Discussions will continue this afternoon.

It was put forward that a ‘super emergency break’ be included in the package, meaning that any one government could question the use of the funds that are being deployed. Such a move would help ensure that the cash was been used for its appropriate purpose. The sooner the bloc can agree on the terms of the rescue the better for everyone, especially countries like Spain and Italy, which were hard hit by the health crisis, and are rely heavily on tourism.

Stocks in Asia are mixed as the CSI 300 is showing solid gains, the Nikkei 225 is flat, while the Hang Seng has turned positive.

The US posted mixed data on Friday. Building permits for June were 1.24 million, and that was a small increase from the 1.22 million in the previous update. The housing starts reading was 1.18 million, which was a decent jump on the 1.01 million registered in May. The preliminary reading of the University of Michigan consumer sentiment was 73.2 in July, its lowest in three months. The heath situation deteriorated in recent weeks, and a number of states have paused the reopening of their economies. That is probably why consumer sentiment slipped.

The US dollar had a negative run last week and on Wednesday it fell to its lowest level in nearly one month. In the last few months the currency has been a popular flight to quality play, and conversely, when dealers have been in risk-on mode, it has typically suffered. Risk appetite has been a bigger factor in the dollar’s moves lately, than economic indicators.

Inflation in the eurozone ticked up in June to 0.3% from 0.1%, but the core reading cooled to 0.1% from 0.3%. The core reading is often deemed to be a better gauge of underlying demand as it removes commodity prices from the measurement. Last week, Christine Lagarde, the head of the ECB, said that inflation is expected to remain low.

In the first week in July, gold hit is highest level since September 2011, but last week it traded sideways. The commodity has a track record of being a safe haven trade, but since the greenback has also become a popular risk-off trade, that has reduced gold’s volatility, due to their inverse relation relationship.

Oil lost a little ground last week as it was announced that OPEC+ will increase their output as of next month. In May, the group cut output by 9.7 million barrels per day (bpd) as a way of propping up the energy market. The ‘historic’ cut helped oil hit a three month high in June. Last week, it was announced the body would ease up on the production cuts to a reduction of 7.7 million bpd as of next month.

The original agreement stipulated that production would be increase in August, and last week that was confirmed. It is worth nothing that oil hasn’t fallen that much from the three month high that was registered in June. By Friday’s close, WTI and Brent crude are only down 2.4% and 1.9% respectively from the June highs.

At 7am (UK time) German PPI will be posted and economists are expecting it to rise from -2.2% in May to -1.6% in June.

EUR/USD – since late June it has been in an uptrend, and if the positive move continues, 1.1495 should be on the radar. If it moves through that level, it could target 1.1570. A break below the 1.1168 area might pave the way for 1.1060, the 200-day moving average, to be targeted.

GBP/USD – has been trading sideways in the past few sessions. A move higher might run into resistance at 1.2698, the 200-day moving average. A move through that level should put 1.2813 on the radar. Should it move lower, it might find support at 1.2418, the 100 day moving average.

EUR/GBP – should the bullish move from late April continue, it could target 0.9239. A break below the 50-day moving average at 0.8983, could put the 0.8800 zone on the radar.

USD/JPY – has been drifting lower for over one month and support could come into play at 106.00. A rebound might run into resistance at 108.37, the 200-day moving average.

FTSE 100 is expected to open 8 points lower at 6,282

DAX 30 is expected to open 5 points higher at 12,924

CAC 40 is expected to open 6 points lower at 5,063

For a look at all of today’s economic events, check out our economic calendar
By David Madden (Market Analyst at CMC Markets UK)

European Markets slip Ahead of the ECB

China Q2 GDP showed a 11.5% rebound, more than reversing the -10% fall in output seen in Q1, suggesting a nice v-shaped recovery in economic activity. The annualised number recovered to 3.2% from -6.8%.

If you had any doubts about the accuracy of China’s GDP numbers before this morning’s announcement, these figures only serve to reinforce that scepticism, as they appear to completely diverge from most of the data that has come out of China since April. In terms of the trade data, both imports and exports have been weak, while retail sales have also struggled.

Retail sales have declined in every month, by -7.5%, -2.8% and -1.8% in June, and with the Chinese consumer now making up around half of China’s economic output, I would suggest these numbers in no way reflect the real picture regarding China’s economy at this moment.

After yesterday’s strong session, markets here in Europe have taken their cues from the weakness in Asia markets and opened lower, as some of the vaccine optimism of yesterday starts to taper off.

On the results front Ladbrokes and Coral owner GVC Holdings have fallen back after reporting a decline in group net gaming revenue of 11%, in the first half of the year, largely down to the suspension of sporting events. The biggest falls in like for like revenues were in the UK and Europe with sharp drops of 86% and 90% in Q2, largely down to the wholesale closure of stores, though with the re-opening of shops in June these numbers are now starting to pick up again.

On the plus side, helping offset that weakness online gaming revenue rose, rose 19% in H1, with a 22% rise in Q2, with a strong performance in Australia. Management said they expect first half earnings to be within the range of £340m-£350m, while CEO Keith Alexander is set to retire and will be replaced by Shay Segev.

Energy provider SSE has said that coronavirus impacts on operating profits are in line with expectations, with profit expected to be in the range of £150m and £250m, though this could well change. The company has said it still expects to pay an interim dividend of 24.4p in November, in line with its 5-year plan to 2022/23.

In terms of renewable output, this came in below plan, but was still higher than the same period a year ago.

Purplebricks shares are higher after announcing the sale of its Canadian business for C$60.5m to Desjardins Group

Aviva announced that it has completed the sale of a 76% stake in Friends Provident to RL360 for £259m.

Royal Bank of Scotland also announced that from 22nd July 2020 it would henceforth be known as NatWest Group, subject to approval as it strives to draw a line under the toxicity of the RBS brand. This toxicity has dogged the bank since the 2008 bailout, along with the various scandals, around rate fixing, PPI and the GRG business, that have swirled around the bank since then. Investors will certainly be hoping so given the current share price performance, and hope that the change in name isn’t akin to putting lipstick on a pig.

Consumer credit ratings company Experian latest Q1 numbers have shown a large fall in revenue growth across all of its regions with the exception of North America, and which helped mitigate a lot of the weakness elsewhere.

The euro is slightly softer ahead of this afternoon’s ECB rate decision, which is expected to see no change in policy. At its last meeting the European Central Bank hiked its pandemic emergency purchase program by another €600bn to €1.35trn, with the time horizon pushed into the middle of June 2021. The ECB still needs to formally respond to the challenge of the German court irrespective of its insistence it is covered under the jurisdiction of the European Court.

Even where Germany is concerned optics are important, particularly if the ECB wants to be seen as a responsible arbiter of the economy across all of Europe, and the PEPP still remains vulnerable to a legal challenge, due to its difference with the previous program. The bank could also indicate if it has any plans to start buying the bonds of so called “fallen angels”. These are the bonds of companies that were investment grade, but have fallen into “junk” status as a result of the pandemic.

This morning’s UK unemployment numbers don’t tell us anything we don’t already know. The ILO measure came in at 3.9% for the three months to May, however the numbers don’t include those workers currently on furlough, and while a good proportion of these could well come back, there is still a good percentage that won’t.

On the plus side the reduction in jobless claims from 7.8% to 7.3% suggests that some workers did return to the work force in June, as shops started to reopen, however the number was tiny when compared to the claim increases seen in April and May, which saw the May numbers revised up to 566.4k.

To get a better idea of where we are in the jobs market the ONS numbers do tell us that there are now around 650k fewer people on the payroll than before the March lockdown, and that number is likely to continue to rise as we head into the end of the year and the furlough runs off.

The pound is little moved on the back of the numbers, while gilt yields have edged slightly higher.

US markets look set to take their cues from the weakness seen here in European markets, with the main attention set to be on the latest June retail sales and weekly jobless claims numbers.

Retail sales are expected to rise 5% in June, some way below the 17.7% rebound seen in the May numbers which reversed a -14.7% fall in April. The strength expected in the June number seems optimistic when set aside the employment numbers, and the 13m people still not working since March. This suggests that this number could well be highly fluid and while a lot of US workers have managed to get their furlough payments, it doesn’t necessarily follow that they will spend it.

Weekly jobless claims are still expected to be above the 1m mark, with a slight reduction expected to 1.25m from 1.31m. Continuing claims are expected to fall further to 17.5m, however these could start to edge higher in the coming weeks as US states issue orders to reclose businesses in the wake of the recent surge in coronavirus cases.

Twitter shares lost ground lost night after the bell as it became apparent that the accounts of high profit individuals like Elon Musk, Warren Buffet and former US President Barack Obama were hacked by a bitcoin scammer. All verified accounts were shut down as a result as Twitter scrambled to get on top of the problem. It’s difficult not to overstate how embarrassing this is for Twitter given that the blue tick offers certainty that the user of the account is the person they claim to be. To have them hacked is hugely embarrassing, and undermines the integrity of the whole blue tick process.

American Airlines shares are also likely to be in focus after the company announced that 25,000 jobs could be at risk, when the furlough scheme runs its course. United Airlines has already said it could cut up to 36,000 people, up to 45% of its workforce.

Netflix Q2 earnings are also due after the bell with high expectations that the company can build on its blow out Q1 subscriber numbers of 15.8m. Q2 is expected to see 7m new subscribers added.

Bank of America is also expected to post its latest Q2 numbers with the main attention on how much extra provision for bad loans the bank will add to its Q1 numbers.

Dow Jones is expected to open 160 points lower at 26,710

S&P500 is expected to open 18 points lower at 3,208

For a look at all of today’s economic events, check out our economic calendar.

By Michael Hewson (Chief Market Analyst at CMC Markets UK)

UK Unemployment Numbers Disguise Fall in Employment Numbers

The ILO measure came in at 3.9% for the three months to May, however the numbers don’t include those workers currently on furlough, and while a good proportion of these could well come back, there is still a good percentage that won’t.

On the plus side the reduction in jobless claims from 7.8% to 7.3% suggests that some workers did return to the work force in June, as shops started to reopen, however the number was tiny when compared to the claim increases seen in April and May, which saw the May numbers revised up to 566.4k.

To get a better idea of where we are in the jobs market the ONS numbers do tell us that there are now around 660k fewer people on the payroll than before the March lockdown, and that number is likely to continue to rise as we head into the end of the year and the furlough runs off.

The pound is little moved on the back of the numbers, while gilt yields have edged slightly higher.

By Michael Hewson (Chief Market Analyst at CMC Markets UK)

Mixed China Data, ECB in Focus

On the home front, the University of Oxford and AstraZeneca are working together on a potential vaccine, and yesterday there was chatter that things are going in the right direction. Nothing was announced, but it was speculated that there could be confirmation about the progress in the near-term, and that verification might even come today. Equity benchmarks on both sides of the Atlantic enjoyed decent gains, and some hit multi-week highs, while others set multi-month highs.

The pharma angle gave stocks a new lease of life as lately market participants have been fixated on the rate of new cases and the fatality rate. In the past week, we have also heard positive news from Gilead Sciences, Pfizer and BioNTech. Gilead’s, Remdesivir, can reduce the death rate by 62%, so that is being touted as a possible treatment. While two of the four drugs that Pfizer and BioNTech are working on as potential vaccines have been fast-tracked for FDA approval.

The optimism surrounding the drug stories overshadowed the news that China’s relationship with the US and the UK has deteriorated this week. The British government has banned Huawei from its 5G network. President Trump passed legislation that has removed Hong Kong’s special status, so the territory will lose out in terms of tariffs. In addition to that, the US government might seek to target individuals or organisations that are seen to be helping the Chinese government to impose itself on Hong Kong.

The moves by the UK and the US stem from the decision by the Beijing administration to introduce a law that has chipped away at Hong Kong’s autonomy. Traders will be keeping an eye on the situation, but it seems that the Donald doesn’t want to spark a big economic conflict with China, probably because he has an election to fight in November and his approval ratings are not great.

The US economy continues to rebound. The industrial production rate for June increased by 5.4%, and that was a big improvement from the 1.4% that was posted in May. The New York Fed manufacturing index jumped to 17.2 in July, a 14 month high. The reports suggest there is a lot of pent up demand, and that is being released as the economy is reopening. That level of growth is likely to taper off as it is unsustainable.

Overnight, China released a number of economic reports. The yearly GDP reading for the second quarter was 3.2%, and the consensus estimate was 2.5%. In the first quarter, the GDP reading was -6.8%. Retail sales in June were -1.8%, undershooting the 0.3% forecast, while the previous reading was -2.8%. Industrial production last month showed growth of 4.8%, and economists were expecting 4.7%.

The May report was 4.4%. Fixed asset investment fell by 3.1%, and the forecast was -3.3%, keep in mind the last reading was -6.3%. Equity markets in Asia are in the red as there are concerns that spending and investment in China remains weak. Indices in Europe are expected to open a little lower.

The ECB meeting will be in focus today. The refinancing rate and the deposit rate are tipped to hold steady at 0.0% and -0.5% respectively. Last month, the pandemic emergency purchase programme (PEPP) was upped by €600 billion to €1.35 trillion, and the scheme was extended from the end of 2020 until June 2021. The inflation and growth forecasts were trimmed. It is worth noting that there has been an impressive rebound in certain economic indicators, such as services and manufacturing.

In late June, the bond purchases made as a part of the PEPP, cooled to its lowest level since the stimulus package was expanded. That could be a sign the ECB want to rein in the easing programme as the economy is recovering at a quicker rate than initially expected. Even if the central are happy with the economic rebound, they won’t want to spook the markets. They will probably play it safe and state they are monitoring the situation, and that they are ready to act, should they feel it is required. The rate decision will be revealed at 12.45pm (UK time) and the press conference will start at 1.30pm (UK time).

The US dollar index fell to its lowest level in over one month yesterday as dealers dropped the greenback in favour of riskier assets, such as stocks. The euro benefitted from the slide in the greenback and it hit its highest level since March.

Metals were a mixed bag yesterday. Gold had a muted move, but it held above the $1,800 mark. Silver, benefitted from the softer greenback and it hit a new 10 month high. On the other hand, copper lost over 1.5%. The red metal had a great run from late March until now, and it is possible that dealers squared up their books ahead of the Chinese data being reported.

The Fed’s Beige Book was posted last night and almost all of the 12 districts saw an increase in economic activity as lockdown restrictions were eased. The outlook remains very uncertain, especially in light of the fact that some states are undoing the reopening of their economies.

Oil rallied yesterday on the back of the EIA report, it showed that US oil stockpiles dropped by nearly 7.5 million barrels, while the consensus estimate was for a draw of 2.25 million barrels. Gasoline inventories fell by 3.14 million barrels, and that was a larger drop than expected. The readings paint a picture of a US economy that is consuming more energy, hence the positive move in WTI and Brent crude.

At 7am (UK time) the UK labour reports will be released. The claimants count for June is tipped to fall to 250,000 from 528,900 in May. The unemployment rate is anticipated to rise to 4.2% in May, up from 3.9% in April. The average earnings reading that excludes bonuses to expected to fall to 0.5% in May, from 1.7% in April.

French CPI is tipped to slip to 0.1% in June from 0.4% in May. The report will be posted at 7.45am (UK time).

Traders will be keeping an eye on the various economic reports from the US. Initial jobless claims are tipped to fall from 1.31 million to 1.25 million. The continuing claims reading is anticipated to be 17.6 million, and keep in mind the previous reading was 18.06 million. The retail sales report for May was 17.7%, a record reading, and the June level is tipped to cool to 5%. The retail sales report that strips auto-sales is expected to be 5%, and that would be a fall from the 12.4% registered in May. The Philly Fed manufacturing index is tipped to be 20. The reports will be posted at 1.30pm (UK time).

EUR/USD – since late June it has been in an uptrend, and a break above the 1.1400 zone might put 1.1495 on the radar. A break below the 1.1168 area might pave the way for 1.1053, the 200-day moving average, to be targeted.

GBP/USD – has been trading sideways in the past few sessions. A move higher might run into resistance at 1.2694, the 200-day moving average. A move through that level should put 1.2813 on the radar. Should it move lower, it might find support at 1.2424, the 100 day moving average.

EUR/GBP – Monday’s candle has the potential to be a bullish reversal, and if it moves higher it could target 0.9239. A break below the 50-day moving average at 0.8963, could put the 0.8800 zone on the radar.

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 108.37, the 200-day moving average.

FTSE 100 is expected to open 18 points lower at 6,274

DAX 30 is expected to open 67 points lower at 12,863

CAC 40 is expected to open 19 points lower at 5,089

By David Madden (Market Analyst at CMC Markets UK)