Dollar’s rebound may be set for a breather with non farm payrolls ahead

03-08-2020

Nikolas Stylianou

US markets – US stocks equities began higher last week, as investors were mainly focused on earnings, however at the end of the week stocks closed narrowly. About 180 of the SP500 companies reported quarterly earnings, including Alphabet GOOGL, Amazon AMZN, Apple, AAPL, Facebook. A weaker dollar should be a positive for equities, though foreign stocks will likely benefit more as analysts said, however is not necessarily good for stocks if it reflects big problems on the domestic front. Apple, Amazon stocks rose by 2.37% and 1.54% respectively, however some other big companies faced negative earnings that showed even larger hit from the coronavirus pandemic than investors had been expecting. Shares of Moderna surged after the company said it received an additional $472 million in funding for its COVID-19 vaccine.  The Senate Republicans announced a roughly $1 trillion coronavirus relief package proposal and they finally found a deal with Democrats in regards with the employment’s payments expiration something that was not achieved yet and created pessimism to the market. Near the end of the week Fed, as it was expected, announced its monetary policy decision, where interest rates were left near to zero, and led US stocks close higher. Powel repeated his promise to provide further support until the economy and unemployment fully recovers and inflation picks up. Powell noted that households and the jobs market have slightly improved since May. The US trade deficit in goods declined to $70.6 billion during June, which represents 6.1% decline in June from the previous month. What caused the US market to drop was the US GDP announcement that showed a fall of 32.9% annualized during the second quarter and dollar became weaker, along with the lack of progress in talks between congressional Democrats, Republicans and the White House on a fresh relief  package which also weighed on sentiment. This week, Wall Street will see quarterly earnings reports from 130 members of the S&P 500.

Asian – Shares in Asia were mostly higher beginning of last week as investors were waiting for further stimulus package from lawmakers, as the US Republicans have finalized a bill worth about $1 trillion. China’s industrial profits for June soared 11.5% year-on-year, according to the country’s National Bureau of Statistics, however Asian stocks were mixed, after the dismal earnings report from big companies, which led investors to become pessimistic. By the end of last week trading Asian shares rose along with US equities as Fed left unchanged its interest rate decision policy as it was initially expected. Asian equities followed US stocks after shares of Amazon, Apple and Facebook surged, amid earnings report but had losses despite the strong US tech earnings and manufacturing recoveries in China and Japan. The resurgence of coronavirus cases, along with the US-China tensions, cause uncertainty to investors and unpredictable market movements. This week Stocks in Japan and China advanced after a private survey showed China’s manufacturing activity expanding by more than expected in July, while mainland-listed tech stocks surged on expectations that Beijing will respond supportively to U.S. moves on Chinese-owned software companies. Equities declined in Hong Kong and tension between the two biggest economies in the world is another threat to risk appetite.

European Markets – Beginning of last week EU stocks opened lower as investors focus on US-China tension, with Stoxx600 edged lower by 0.2%, while corporate earnings season gathered momentum. European equities advanced slightly higher later on the week as signs of progress on fresh U.S. government stimulus efforts. New travel bans were imposed in Asia and Europe as surges in Covid-19 cases had been reported in several countries which had seemingly contained the virus and that affected the European market negatively. European equities could jump 10% on the back of a historic agreement over fiscal stimulus in the European Union, Morgan Stanley said in a note, due to the recent decision of the EU leaders to raise up 750 billion euros and open the door to common debt borrowing. According to Refinitiv, data profits for STOXX600 companies are expected to decline by a record 59% in the second quarter of 2020. Germany’s economy contracted by 10.1% in the 2nd quarter of 2020, against a 2% contraction in the 1st quarter. Economists forecasted a 9% contraction which was worse than expected and, despite all that, euro get even stronger against major counter dollar as Fed print too much money.

Gold Market– Gold prices advanced even higher to a new record beginning of last week. Spot gold was traded as high as $1,943.927 per ounce, and those levels eclipsed the previous record high price set in September 2011. Gold climbed to a record high, surpassing the all-time highs breaking above the level of $1919 per ounce driven by a new spike in new coronavirus cases that have added to economic uncertainty. Gold finally broke above $1955 per ounce and on Friday reached a new high record of $1988 per ounce, before retreating to $1955. Globally, demand in gold for the first and second quarter of 2020 has dropped, however gold as an investment jumped to new records as gold ETF’s touched an all-time high by the end of June according to World Gold Council today. The metal for use in investment as a jewellery, technology and in central-bank purchases, has fell 11% year-on-year in the second quarter of 2020, at 1,015.7 metric tons, pulling demand for the first half of the year down by 6% to 2,076 metric tons. The chief investment officer of a private wealth management at Goldman Sachs Sharmin said that gold is overpriced, however raised its 12-month forecast for gold to $2300 from $2000 per ounce. The precious metal keeps the higher high formation intact, although its repeated failures to reach $2,000 per ounce after each run-up. According to CME, investors have decreased their open interest in gold futures by 26.1k, indicating that further upside is limited and some correction to the downside it is expected in the short term so there is a potential of a postponement to touch the psychological $2,000 per ounce.

Oil Market – Weak dollar continues to support crude Oil but rising tensions between the US and China partially offset positive impact in black gold prices. At the start of last week, prices of the barrel of WTI were extending the side-lined theme around the $41.00 mark amidst rising open interest and volume, which supported further consolidation pattern for a short-term period. The American Petroleum Institute announced a draw in crude oil inventories of 6.829 million barrels for the week ending July 24, better than expected and led oil prices slightly higher. The rising geopolitical tensions between the US and China could even begin to weight on oil, with reports that Chinese imports of energy products are only 5% of where they need to be by year-end under the terms of agreed trade deals. Oil futures closed even higher yesterday, after the Energy Information Administration’s (EIA), showed 10.612 million barrels weekly decline in U.S. crude — the largest so far this year, a number which was far away from expectations. End of the week Crude Oil fell following Trump’s tweet where he said to delay the presidential elections of November 2020, even though he cannot do it. Investors have concerns about a resurgence of coronavirus around the world. Iraq’s rising oil exports have increased concerns that Russia and the Saudis might start unwinding the OPEC+ deal as Iraq continues to cheat on production cuts. Oil closed even lower close to $40 per barrel as OPEC and its allies’ producers commenced supplying more crude Oil globally where many countries are still struggling to contain the coronavirus. More specifically OPEC will supply about 1.5 million barrels during this month, which is more than in July and Russia has already started lifting its output. West Texas Intermediate (WTI) for September delivery fell by 0.6% to $40.04 per barrel after rising 2.6% in July. Brent for October settlement slipped 0.3% to $43.37 per barrel after gaining 0.6% on Friday.

Foreign Currencies – Euro was resuming the bullish momentum last week and achieved to break above the 1.17 critical level. The Eurozone’s manufacturing PMI rose from 47.4 to 51.1, with the services PMI jumping from 48.3 to 55.1, while the US Manufacturing PMI rose from 49.8 to 51.3 falling short of a forecasted 51.5. Sino-US tensions and fiscal deadlock in the US add to the dollar’s weakness. Another reason that euro rose was the July Business Climate Index rise from 86.3 to 90.5, pointing an increase third month in a row. Economists had forecasted a rise to 89.3. Fed announced that its board of governors had decided to extend until the end of the year several emergency loan programs that had been set to expire on Sept. 30. After the unchanged interest rate from Fed, euro managed to surpass the 1.18 critical level and finally dollar weakened even more. Euro has extended its gains at last week’s closing by reaching the substantial level of almost 1.19, the highest level since June 2018, as the demand for the currency and other EU assets increased, amid expectations that normal economic activity would continue faster in the region. Despite German GDP announcement, which showed a contraction of minus 10.1 against 9% that was expected, euro managed to climb even higher and justified analysts’ predictions. According to Refinitiv, about 1.36 million new US jobs are expected, well below the 4.8 million added in June, and the unemployment rate is expected to fall to 10.7% from 11.1% which may support dollar. Other provisions, such as another round of $1,200 stimulus checks, have broader support from both political parties. Further down, 1.1625 and 1.1540 are observed. Concerns about rising coronavirus cases, along with Sino-American tensions weighed on the USD and kept exerting some pressure. Pound was still appreciated against dollar last week and concerns about rising COVID-19 cases, worsening US-China relations undermined the USD. Pound was almost in overbought conditions and prevented investors for further bullish movements and that came amid fears of a no-deal Brexit, however pound close the week above 1.30, as FX Strategists at UOB Group predicted. Another reason pound appreciated against dollar was that the National Institute of Economic and Social Research (NIESR) noted that they see the UK economy shrinking by only 10% in 2020. The strength is very interesting as the Bank of England is considering negative interest rates. The US fiscal impasse, along with the decline of US bond yields undermined the green buck and, despite the UK government announced local lockdown and Brexit-negative news, the cable appreciated. A shooting star candlestick pattern was observed in pound/dollar on Friday closing, indicating that pound may drop back to 1.29 price range after the sharp advance during last week and July with over 5.5% gains. A combination of factors such as no deal Brexit, coronavirus woes and dollar pullback lead pound lower. Bulls stay hopeful over the Tory government’s ability to offer more stimulus, positive trade talks with the US and Japan. The Japanese yen was traded at 105.63 per dollar last week after strengthening from levels above 106.5 against the greenback. Dollar/Yen remained under some heavy selling pressure and concerns about rising coronavirus cases, along with Sino-American tensions weighed on the USD and kept exerting some pressure. For three consecutive days dollar lost value against yen streak while extending pullback from 105.45, as Japan’s Corporate Service Private Index rose past-0.5% forecast to 0.8% in June and dollar remain weaker against its major counterparts. Dollar was trying to recover later on the week, despite upbeat Japanese Retail Trade data which showed decrease 1.2% than 6.5% what expected. BOJ policymakers suggested will extend negative rates if needed after Nikkei signalled downgrade in Japanese GDP forecast. The recent dovish view from Fed negatively affected the dollar against its major counterparts, like yen. USD/JPY is seen navigating within the 105.00/107.00 range within this week, suggested FX Strategists at UOB Group. Despite dollar bounce Dollar/Yen upticks lacks and the daily RSI remains bearish ahead of the US ISM data. In the short term a bearish momentum is expected with a resistance level be at 106.4

NFP Expectations:

Non-farm payrolls it is expected to add a net of 2.2M jobs (from 4.8M) in July. Despite that the outlook of recent weeks is worse, both initial and continuing claims are down relative to the previous month’s non-farm-payrolls survey reference week. That indicates that 1.1 million jobs could have been generated within July, a marked deceleration from the 4.8 million added in June. That would leave only 39% of the jobs lost through April recouped as of July, and 13.6 million fewer Americans employed than in February, proving that the US labor market has a long way to go.

Weekly News 03-08-2020 – 07-08-2020