The weekend news will not have given investors much clarity to start the week, after a listless New York session on Friday night. The main story to emerge was that the European Union talks on the mooted EUR 750 billion pandemic recovery fund had stalled. As ever with Europe, one team, one dream, becomes a deadlock holiday whenever the subject of jointly issued debt, or fiscal transfers between the countries of the block come up.
Germany and France left the talks early, in a sign talks weren't going well. The intractable fiscal trust issue between the Northern Europe "frugal four," and the Southern "Club-Med" countries is as strong as ever. The EU's weak underbelly has always been its inability to respond quickly to urgent situations and fiscally work together, leaving the ECB to paper over the cracks. The only person who will be happy with the weekend events will be the UK PM Boris Johnson, who is probably humming "I told you so" under his grey mop. The EU has dodged several bullets since the inception of the Euro, mostly by the rest of the world doing the hard work for them, and a hefty dose of good luck. One day that luck is going to run out.
It is symptomatic of the lack of inertia in global markets at the moment, that the effect on the Euro has been precisely zero. EUR/USD is sharply unchanged from Friday's close at 1.1430. Traders may still believe that the EU will cobble something together at the last moment, and the steady price action will comfort Euro long positions.
The US Congress faces its very own fiscal cliff this week, somewhat lost in the noise of the Covid-19 pandemic. This week is the last for the direct monetary transfers to the general populace from the Federal Government. Washington DC will have to immediately and quickly decide whether to extend the programme, and if so, in what shape, form and size. Depending on how ugly or not the bi partisanship becomes, this story has the potential to move markets later in the week.
Those discussions are taking on more urgency as Covid-19 continues its rampage across the Southern and Western United States. Enhanced shutdowns are now a genuine possibility as the US failed to emerge from even the first wave of the pandemic. Elsewhere, the news was equally bad. Things are going from bad to worse in India and Brazil. Worryingly, countries such as Hong Kong, and Victoria and New South Wales States in Australia are facing second waves, with social restrictions ramped up once again. That trend is being repeated across the globe and could well undermine any incipient globally recovery in Q3. Markets have not priced in, or are refusing to countenance, this outcome.
I will dwell on the US earnings season but briefly. In a nutshell, big tech such as Microsoft and Intel should produce sparkling results this week. Tesla could make a small profit or a loss. If it makes a profit, that could see another wave of buying of Tesla stock as it edges closer to the S&P 500 entry. United Airlines also reports this week but buying airlines, consumer discretionary, or high street retail is catching the proverbial knife. Make sure you have plenty of spare fingers.
Economic data this week is bookended by China's Loan Prime Rate (LPR) decisions this morning, and South Korea's GDP on Thursday. Both the one and five-year LPR's were left unchanged today. China's approach is surgical stimulus, and they remain wary of stoking asset price inflation by one size fits all rate cutting. South Korea's Q2 GDP is expected to shrink again on Thursday, tipping it into its first technical recession since SARS in 2003. There is a very broad range of forecasts out there though, and thus, the potential for a positive surprise.
Japan's exports for June were released this morning. Exports YoY shrunk by a larger than expected 26.2%. Japan remains the region's laggard and is now confronting its own escalating Covid-19 issues. The rest of the day's calendar is strictly second tier across Europe and the United States, hinting at a listless day ahead with attention focussed on headlines and US earnings reports.
Asian equities start the week mixed
Wall Street gave no hints for the coming week, as its major indices finished almost unchanged in a directionless session. The S&P 500 rose 0.29%, with the Nasdaq creeping 0.28% higher. The Dow Jones eased by an innocuous 0.23%.
The story is much the same across Asia today. The weak data from Japan earlier has seen the Nikkei 225 ease by 0.35%, with South Koreas Kospi falling 0.50%. Hong Kong has declined 0.55% and the Straits Times in 0.20% lower. Australian shares are slightly lower, weighed down by Covid-19 concerns. The ASX 200 is down 0.50%, and the All Ordinaries is lower by 0.40%.
Mainland China has had an equally directionless start, both the Shanghai Composite and CSI are unchanged in choppy trading. Hong Kong is likely to continue to track lower though, as new social restrictions were announced by the government over the weekend to combat its increasing Covid-19 outbreak.
Today's session is likely to be characterised by investors taking some risk off the table, with a lack of data concentrating attention on Covid-19 risks, which appear to be rising across the region. A disappointing EU summit is likely to have the same effect on European shares this afternoon.
Covid-19 spurs modest US Dollar strength today
In the absence of any drivers from weekend news and a quiet data calendar, Covid-19 has shifted back to front and centre in currency traders’ minds. On this metric, none of the news emerging this weekend is positive, with Hong Kong and parts of Australia increasing restrictions, and India was hitting the dubious milestone of 1 million official cases. Nagging concerns are growing in volume regarding the United States as well, with Covid-19 threatening the nascent economic recovery there.
That has seen the US Dollar gain strength across the board today, as trader's start the week in risk-aversion mode. Only the Euro is, somewhat surprisingly, holding its own given the failure of the weekend’s pandemic recovery summit. The street is clearly pricing "something" happening still, and Euro's strength suggests that a move higher to 1.1500 this week is not of the table.
Elsewhere though, the majors are in broad retreat. GBP/USD has fallen 0.30% to 1.2526, the AUD/USD is also lower by 0.30% at 0.6975, USD/JPY has risen by 0.30% to 107.35, and the NZD/USD has retreated 0.25% to 0.6540. Despite the noise, the majors are still well and truly stuck in range-trading mode. The inability of AUD/USD and NZD/USD to close above 0.7000 and 0.6600 respectively, is raising concerns though, that a near-term downward correction could occur.
A stronger PBOC fix at 6.9928 today has seen the CNY hold its own at 6.9975, while the SGD, IDR and MYR are gently lower versus the greenback.
We expect the US Dollar to remain in the ascendant throughout the Asia session, with Covid-19 stealing the headlines on an otherwise quiet news day.
Oil retreats on growth concerns
Oil is lower in Asia today following a very quiet Friday session in New York, where both Brent crude and WTI finished ever so slightly lower. Oil markets have ignored news that Saudi Arabia's King Salman has been admitted to hospital for medical tests. Far more concerning to participants today is the growing realisation that the risks of a second Covid-19 torpedo to world growth grow increasingly likely by the day.
Brent crude has fallen 0.50% to $42.90 a barrel, and WTI has declined 0.60% to $40.30 a barrel. That brings both contracts closer to their mid-range levels of the past month. At his stage the falls on Friday and today are limited in scale, suggesting choppy range trading rather than a structural turn in sentiment. The trajectory of the pandemic, and a lack of inertia this week in Europe and the United States on the stimulus front, could undermine that support.
Critical resistance remains at $44.00 a barrel for Brent crude, and $42.00 a barrel for WTI. Only a failure of $40.00 and $37.50 a barrel respectively will disrupt the medium-term recovery picture. In the meantime, more tail-chasing range-trading looks to continue to be the norm for energy markets.
Gold's consolidation continues
A non-descript session on equity markets, and weekend risk hedging, lifted gold to the middle of its recent range on Friday. Gold finished the day 12.0 dollars higher at 1810.00 an ounce. Asia has shown no inclination to rock the boat this morning, with gold sharply unchanged in subdued trading.
Gold has formed support at $1795.00 an ounce over the past week. However, only a failure of $1780.00 an ounce calls the uptrend into doubt. That said, gold is lacking momentum to meaningfully push either way now, meaning that the $1819.00 an ounce resistance zone looks set to continue capping rallies.
Gold has yet to show serious tailwinds from the escalating Covid-19 pandemic concerns, hinting that we have more range-trading days ahead of us this week.
The Link LonkJuly 20, 2020 at 09:48AM
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Europe wallows in a deadlock holiday - FXStreet
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