عقود الفروقات هي أدوات مالية معقدة، وتنطوي على مخاطر عالية لخسارة الأموال بشكل سريع بسبب الرافعة المالية. 73.9% من حسابات مستثمري التجزئة يخسرون الأموال عند تداول عقود الفروقات مع هذا المزود. عليك الأخذ بعين الاعتبار ما إذا كنت تفهم طريقة عمل عقود الفروقات، وما إذا كان بوسعك تحمل المخاطر العالية لخسارة أموالك.
Stocks slip despite vaccine positives, banks up, SAP weighs on DAX
With the US election just around the corner, equity markets may continue to track sideways as they await the outcome and remain on the hook for headlines around stimulus and the spread of the virus.
We can expect volatility but no clear trend until the election is out of the way. A Democrat clean sweep would unleash a massive deluge of stimulus, but tax reforms could see a wave of selling before Christmas in anticipation of beating a hike to capital gains tax.
Asian shares were flat to lower overnight. US futures down 1%.
The S&P rallied 0.34% on Friday to end the week at 3,465. European shares opened lower erasing Friday’s bump after another tough week.
WTI (DEC) slumped to $38.50 after Libya said it could raise output to 1m barrels a day within four weeks. Supply-side concerns are heaped on top of rising demand-side concerns as the winter approaches.
Not a huge amount of news flow this morning but it’s set to be a very busy week with earnings season continuing over on Wall Street as 183 S&P 500 companies report including Big Tech. Apple, Amazon, Microsoft, Alphabet, and Facebook are among the biggest names delivering their quarterly updates.
Meanwhile, central banks are in action aplenty with the Bank of Japan, Bank of Canada, and European Central Bank all holding policy meetings.
AstraZeneca shares rose by one percent after the firm is reportedly seeing a strong immune response from its coronavirus vaccine in older people. It comes as the FDA allows AstraZeneca to restart trials in the US, meaning clinical trials have now fully resumed globally.
Additionally, a spokesman said the latest results build the body of evidence for the safety and immunogenicity – the ability to produce an immune response – of the vaccine candidate.
Meanwhile, separate reports suggested that a large London hospital will start receiving vaccine stocks in November – though health secretary Matt Hancock was swiftly on the wires to say that he does not expect health workers to be receiving the Astra Oxford vaccine this year. AZN +1% in early trade.
SAP shares in Germany fell 20% in early trade before paring losses to trade -16% after it cut its 2020 sales outlook citing weak demand for cloud services – potential knock-on for MSFT, AMZN.
With broad-based selling taking place at the European open, reports that UK regulators will allow banks to start paying dividends again next year failed to deliver any bid on the open.
However, shares in Lloyds, Barclays and HSBC bounced and turned positive as investors finally woke up the prospect of dividends resuming – momentum can build with divis seriously on the table again. HSBC reports this week – all eyes on whether it feels confident to start payments to shareholders again. Dividends at last year’s levels would equate to roughly 12% yield.
Ant Financial is on track to become the world’s biggest-ever IPO with shares set to price tomorrow – although Jack Ma said over the weekend the company has already determined the price.
Ant will list simultaneously in Hong Kong and Shanghai in the coming weeks. It’s expected to raise $30bn, which would surpass Saudi Aramco’s $29.4bn record set last year, will likely use the ‘greenshoe’ option worth another $5bn to meet demand, which is reaching mania-like levels among local retail investors, according to several reports. Institutional demand is also seen as being very strong.
Brexit talks will continue after talks between Frost and Barnier in London were extended through to Wednesday this week, whilst sources indicate that there are plans to carry on the party in Brussels from Thursday. GBPUSD started the session weaker as the dollar caught some bid overnight. Cable dipped to 1.30 and a test of the 50-day SMA. The dollar index has recovered 93 near the top of the Wed-Fri range.
The euro was trading steady to a little weaker after Italian bond yields fell in the wake of Friday’s upgrade from S&P. Italy’s debt was raised from BBB negative to BBB stable. The move has narrowed the bund-BTPs spread and comes ahead of the ECB meeting and Christine ‘we’re not here to narrow spreads’ Lagarde presser afterward on Thursday.
I looked at this in more detail in the week ahead, it’s clear that with virus restrictions being reimposed and the risk of a double-dip recession rising, it’s clear that the assumptions for growth contained in the ECB’s September report look out of step with reality. Given the murky outlook and dreadful inflation backdrop, it seems all but certain the ECB will increase its bond-buying programme by another €500bn by December and may use this week’s meeting to hint as such.
The last week of campaigning, but voting is already gathering pace. Biden leads by 8pts nationally, but by just 3.8pts in the battlegrounds.
He was closer to Clinton at this point – but comparisons with 2016 may not be relevant when so many people have already voted. Trump is showing tremendous energy, embarking on a frenzy of campaign events, while Sleepy Joe is just trying not to lose.
ECB: Pandemic focus
With the euro gaining ground again versus the US dollar, attention in the FX markets will be on the European Central Bank (ECB) meeting on Thursday.
Market participants are increasingly betting on the ECB carrying out further easing in a bid to boost faltering economic growth and stagnant prices.
The Eurozone slid into its second straight month of deflation in September and with further lockdowns being imposed across the bloc, the risks to the economic outlook have clearly deteriorated since the last meeting and the assumptions for growth contained in the ECB’s September look out of step with reality.
Weakness in Friday’s PMIs highlight the concern among businesses, particularly in services. The threat of a double dip recession is real, and Christine Lagarde recently commented that the resurgence of the virus is a clear risk to the economy.
Given the murky outlook and dreadful inflation backdrop it seems all but certain the ECB will increase its bond buying programme by another €500bn by December – albeit it may choose to increase PSPP rather than PEPP – for the markets these acronyms won’t matter too much – it’s the size and duration of the liquidity injection that matters, not how it is presented.
Lagarde may drop some hints in the press conference to increasing PSPP/PEPP envelopes in December, but will not over-commit. Moreover, with progress on delivering on the fiscal side slow, the ECB will feel obligated to step up.
To get a flavour of the mood in the ECB, the usually hawkish Austrian central bank head Robert Holzmann said recently: “More durable, extensive or strict containment measures will likely require more monetary and fiscal accommodation in the short run.”
As far as the currency goes (why else are we bothering?), the line in the sand for the central bank was 1.20 on EURUSD – a level that prompted chief economist Philip Lane to comment that “the euro-dollar rate does matter”.
Traders should pay attention to any nod to currency worries from Christine Lagarde – another run at 1.20 looks credible, particularly if there is a Democrat clean sweep in November’s elections as this is seen as a headwind for the dollar and likely positive for the euro due to better trade relations.
Fundamentally it will be more of the same from the ECB with it stressing it is ready to do more and the momentum is with the doves to ease more.
Meanwhile, there are also meetings of the Bank of Japan and Bank of Canada taking place this week.
Sterling stabilises after Brexit furore, equities steady
Sterling stabilised after testing new six-week lows yesterday following the testy exchanges around the internal market bill, but the pound remains highly exposed to negative news around Brexit talks.
The EU Commission said the bill has damaged trust and would, if adopted, represent a serious breach of the withdrawal agreement and of international law. The British position remains resolute. The UK government legal opinion is that it remains a sovereign matter of UK domestic law.
This is serious brinkmanship, and trade talks appear close to collapse. Moreover, it is opposed by the devolved regimes in Scotland and Wales – if it passes and there is no deal, the relationship between Westminster and Holyrood will be close to breaking point and it could accelerate and heighten demands for Scottish independence.
The EU wants the offending bill pulled by the end of the month or they may launch legal action – but stopped short of saying they will walk away from the trade talks. The EU doesn’t want to be the first to walk away. Nevertheless, there has been a material escalation of no-deal risks, which was reflected in the pound’s price action yesterday.
The clock is ticking and whilst we continue to stress that a deal will always look further away than it is due to the nature of the posturing and public statements, the move on the internal market bill comes somewhat out of left-field (although it was actually reported back in Feb that the govt was working on it) and it does not pertain to the talks themselves.
We should also note that it is not guaranteed to pass both British chambers in its current form. Europe’s finance ministers are gathering today so expect a lot of headlines criticising the British – plus ca change. The good news is there is UK-Japan trade deal ‘in principle’ – hopefully that means cheaper wagu steak.
Euro up after ECB meeting, UK GDP disappoints
GBPUSD dropped under 1.28 but has found some support at this level and pared back losses a touch. Against the euro, the pound plunged to its weakest since March, as the single currency also found bid after the European Central Bank sounded a bit more optimistic on the economy and a little less dovish than the market had thought.
The ECB indicated it would not overreact to the appreciation of the euro, which was a green light for the currency to rally. ECB sources suggested they don’t think the euro is overvalued and don’t want to start a currency war – let’s wait and see what happens when 1.20 gets tested again.
Meanwhile, Britain’s economy faces even greater uncertainty from Brexit as it tries to rebuild in the wake of the pandemic. GDP rose 6.6% in July, but this was short of expectations and still well below pre-pandemic levels. All areas of manufacturing, particularly distillers and car makers, saw improvements, the ONS said without a hint of irony.
In July, monthly GDP was 11.7% lower than the pre-pandemic levels seen in February 2020.
The good news is that because of the way the UK measures education in GDP numbers, means things should pick up as the number of pupils returning to school rises. It also means the decline in GDP might not be so bad compared with peers as it looks.
Among the service sector, accommodation & food services remain worst hit, but we know it got a big – albeit temporary – boost in August from the Eat Out scheme.
Impasse over US stimulus continues
European markets were flat on Friday after US markets pulled back on Thursday, declining for the fourth day in five, with the Nasdaq down another 2% and the and the S&P 500 falling 1.75% on the back of the previous session’s rally.
The resumption of the downtrend came as Senate Republicans failed to pass their $500bn stimulus package, with Democrats complaining it does not go far enough. The impasse has doused hopes Congress can agree a package in the near-term and could give a tailwind to bears who have the bit between their teeth. US futures are higher.
Concerns about the US economy remain. US jobless claims just aren’t heading in the right direction. The total number of people claiming benefits in all programs for the week ending August 22 was 29,605,064, an increase of 380,379 from the previous week. In the week to Sept 5th initial claims hit 884,000, unchanged from the previous week’s revised level. The previous week’s level was revised up by 3,000 from 881,000 to 884,000. US CPI numbers out later today are the main eco event to watch, but the furore over the internal market bill is not going away.
Moody music around Brexit sends sterling lower
Sterling took a bit of a kicking as the mood music around this week’s Brexit talks took a decided turn for the worse. The EU came out with some pretty stern words for the British government over its internal markets bill. Less Ode to Joy and more Siegfried’s Death and Funeral March.
The EU Commission has come out fighting, saying the bill would, if adopted, represent a serious breach of the withdrawal agreement (perhaps) and of international law (more dubious, since the EU cannot hold any sway or sovereignty over UK domestic markets, laws or affairs after the exit from the EU).
Anyway, the British position (on paper at least) remains resolute. The UK government legal opinion is that it remains a sovereign matter of UK domestic law, which of course, it is, regardless of what the EU may think.
Brexit talks under threat as EU warns UK has ‘seriously damaged trust’
The EC called on Britain to ditch the problem elements of the bill by the end of the month and warned that the UK has ‘seriously damaged trust between the EU and the UK’, adding that ‘it is now up to the UK government to re-establish that trust’.
This is real brinkmanship. It is one of three things: it is either a cynical masterstroke in negotiating a deal. Two, it is a cynical move but a miscalculation on the British side, as it may fatally undermine the good faith basis discussions. Or three, it is simply a genuine good faith step based on the British desire to main the integrity of its own internal market, just as much as the EU insists on maintaining its own single market.
Either way the language and tone coming out of everything today would suggest a material increase in no deal risks – more no doubt to follow later this afternoon.
Pound sinks on heightened no-deal risks
GBPUSD sank to fresh six-week lows under 1.2860 with the road to 1.280 clear after breaching the 50-day line, which had offered the support yesterday. EURGBP surged to its strongest in 6 months above 0.92, boosted as a hawkish-sounding ECB put a firm under the EUR.
The euro was sent spiking against the dollar before easing back a touch after the ECB left rates unchanged and indicate it was all very pleased with itself and doesn’t think it needs to do a lot more. Christine Lagarde seemed far too relaxed about the appreciation in the euro, which helped send the currency back up to 1.19.
All in all she did beat a dovish drum and seems to have got her communication rather muddled, again. But after this spike, a bit of dollar bid came back as risk assets soured following the US open.
BT shares leap as European equities trade higher
Still no love for Europe? Equity indices in Europe dropped last week as risk appetite waned into the weekend, whilst US stocks closed Friday at record highs, albeit the rally since the March lows has been very uneven – all the chatter over the weekend was about a K-shaped recovery.
Can beaten down value stocks catch up? With Europe lacking a lot of the high-quality tech and growth names, it may struggle until there is a vaccine, the pandemic is over, and dividends are reinstated. Short-term the price action in stock indices seems more down to the individual narrative of the day or week.
Stocks up as markets focus on Covid-19 treatment and vaccine news
Today it’s positive. European equities took the cue from a strong Asian session and pushed higher on Monday morning, with the narrative centring on treatment and vaccine news. Donald Trump is said to be mulling fast-tracking AstraZeneca’s vaccine candidate, whilst the FDA issued an emergency use authorisation for using plasma from recovered patients to treat Covid-19. Shares in AstraZeneca rose 2% in early trade.
Meanwhile, the US and EU have struck a ‘mini’ deal to cut tariffs on a range of items, which marks an important de-escalation of trade tensions that has dogged relations for many months.
BT surges as it readies takeover defence
BT shares leapt 7% after reports it is seeking to bolster its defences against a possible takeover. At a valuation of £10bn, the group has become a definite target. And whilst BT has a lot of legacy baggage – notably £18bn in net debt and a major pension deficit – it’s also got the Openreach crown jewel, which would be worth considerably more on its own than the group is valued today.
Of course, there is no formal offer, but shares could jump further if one emerges. Deutsche Telekom, which owns 12% in BT, is seen as a likely candidate. The question is whether there could be more bombed out UK-listed stocks that could be taken out by a timely takeover…perennial rumour-favourite ITV, for instance?
Deadlocked Brexit talks weigh on Sterling
Elsewhere, sterling made a push higher last week, but the dollar came back. Brexit talks did not go very well and there was virtually zero progress on some key elements. The failure to break the long-term weekly trend resistance makes GBPUSD susceptible to further pull backs, with a gravestone doji weekly candle also a bearish indicator. Support kicked in at 1.3060 on Friday and offers the near-term test for bears.
Bulls will require a weekly close above the trend line to be confident. EURUSD failed to overcome 1.1960 and pulled back to 1.1760 where it has found support. A further rise in EUR net long positions to almost 200k contracts evident in Friday’s COT report from the CFTC indicates extremely bullish positioning that may be too crowded and liable to a squeeze lower. GBP speculative positioning turned net long from net short for the first time since April.
What we’re watching this week:
Republican convention fires campaign starting pistol
The Democrats seem to have got through their set-piece without a hiccup. Now over to Trump and co for the Republican convention, which will not only mark the starting pistol for this year’s presidential run, but also the race for the 2024 GOP candidate. Market attention will increasingly come around to the November presidential race with barely over two months left until polling day.
Vix futures indicate investors are starting to position for more volatility as the election approaches and we should be prepared for a decent nudge higher in volatility and swing lower for stocks over the next two months. This is will be the last major set piece event before the first presidential debate on September 29th.
A confusion of central bankers convene in Wyoming online for the annual Jackson Hole Symposium. This year’s virtual theme is “Navigating the Decade Ahead: Implications for Monetary Policy”. I could answer that in one sentence: lower for longer, outright debt monetization, force inflation up to clear debts. But I’m not a central banker, although I would go to Jackson Hole for the trout fishing.
Federal Reserve chair Jay Powell speaks on Thursday just a few moments before the US cash equity on Wall Street. Bank of Canada Governor Tiff Macklem follows and Bank of England Governor Andrew Bailey speaks on the Friday. Given the way the minutes of the Fed’s July meeting rocked risk appetite and checked the bulls’ progress, this will offer a chance to catch up on where the Fed one month on with its mid-September FOMC meeting in focus.
Economic data to watch
There is a lot of economic data to get through this week, notably some Q2 GDP second estimates for the US among others. On Tuesday we are looking at the US CB consumer confidence report. Wednesday sees the weekly crude oil inventories report as well as US durable goods orders and Australian construction activity. On Thursday the US weekly initial jobless claims number gets released, after last week’s disappointing print of 1.1m. Look also at the pending home sales and preliminary (second estimate) GDP numbers.
More US data rounds out the week on Friday with the Fed’s preferred inflation gauge, the core PCE price index; personal spending; University of Michigan consumer sentiment; and the Chicago PMI on the slate.
Earnings to watch
Ad titan WPP reports it interim results for the six months ended June 30th on Thursday. The advertising giant is a useful barometer of economic confidence. Big brands have slashed marketing budgets to cope with pandemic and WPP has warned of the hit it will take this year.
But rival Publicis reported a 13-% drop in second quarter like-for-like sales, which was well ahead of the –20% anticipated. Shares in WPP are down over 40% this year – could Publicis offer a clue as whether the stock may find a new course? Does WPP see ad spend picking up? How has the Facebook boycott impacted it?
We are also interested in recruiter Hays – which reports finals on Thursday and is often a great indicator as to the overall health of the labour market globally. Salesforce.com(CRM) is expected to deliver earnings and revenue growth when it reports numbers for the quarter ended July on Tuesday. EPS is seen at $0.7 on revenues of $4.9bn.
FX Strategy: Cable drops after stalled Brexit talks get nowhere
Sterling fell back to session lows with a view to the week lows being tested after Brexit talks seem to have gone nowhere. The two sides are still too far apart. Specifically, the EU wants to agree on fisheries and state aid rules before making progress on anything else. EU demands for a level playing field are non-negotiable if there is to be more than a low-level agreement.
Michel Barnier was not upbeat and whilst reiterating that a deal is possible, he said an agreement seems ‘unlikely’ and is concerned about the state of play. David Frost, his British counterpart, said talks were useful but little progress had been made.
The next round of talks take place the week commencing September 7th. Whilst the market was not positioned for a breakthrough this week, it’s getting closer and closer to the crunch point – the longer we go without a deal the more pressure comes onto the pound.
The two sides are still a long way from agreement on key terms. We should note that Barnier as the EU mouthpiece will always be pessimistic right up to the moment a deal is done. Nevertheless, on certain fundamental principles it looks as though the chasm is too great to bridge.
Grappling with the competing concerns of sovereignty (UK) and integrity of the single market (EU) goes to the very heart of the talks. Both sides need to make philosophical compromises before the practical compromises can follow. This is where I start to become concerned about a big, comprehensive deal being done.
Meanwhile EURUSD has dropped under 1.18 after a weak round of PMIs raised fears about the pace of recovery in the Eurozone and traders are starting to show concern the recent ramp in EUR may be overdone. Net long positioning in EUR has become very stretched and the EURUSD is susceptible to a squeeze lower.
Chart: Weekly GBPUSD – trying to break descending trend line. A close under here opens path back to the roaring 20s. We’ve seen a lot more volatility in GBPUSD this week with larger daily moves than generally seen of late.
Chart: Daily GBPUSD – Competing forces at work. Last week’s MACD bearish crossover still points to lost momentum and near-term weakness despite the throwover this week. Golden cross acted as a bullish confirmation of the thrust higher this week. Bollinger starting to point to break out, with downside in favour following today’s Brexit briefing and generally risk-off tone to the end of the week favouring USD.
European shares stutter after Wall Street’s all time high
US stocks closed at record highs but European stocks remain a lot more subdued, with the FTSE 100 struggling at the open today after suffering a sharp reversal in the latter part of the session yesterday. Bulls did try to wrestle control from bears in the first hour of trading, but it looks like it will be another volatile day and a lot will depend on how Wall Street performs in the first hour or two of the NY session. House speaker Nancy Pelosi said the Democrats could be willing to agree to a scaled-down stimulus package, which has helped soothe risk muscles. Asian shares were mixed and US futures are flat.
Whilst the S&P 500 notched record intra-day and closing highs, the FTSE 100 is tracking close to the lower end of the June range and is –20% YTD. Sterling’s strength has not helped but European equity markets just haven’t matched expectations. The DAX has done better but remains some way off its highs. While we focus on the broad market in the US, the fact is it has been driven largely by a rather narrow group of stocks and the rest of the market has not enjoyed the same bounce. Tech is up 50% for the last 12 months, whilst Energy is down 30 per cent.
The question is whether this is early cycle or the death throes of the last bull market. Either you read this as a sign that the market could go a lot higher as we enter a cyclical bull market with lots of cash sitting on the side lines still to pour into value, or you worry that this is a Fed-fuelled tech bubble with forward earnings multiples looking enormously stretched at around 25x on a forward basis. I would be concerned that volatility will increase as we head into the autumn with the election looming and there is at least a chance of a technical pullback for the S&P 500. And how much more stimulus can you throw at this? The Fed has killed the bond market and lifted the boats – but how much more can it do? If the market tests the Fed again, what is left in the tank?
For the FTSE 100, the near-term downtrend is starting to approach important support levels.
USD can’t catch bid
In FX trading, the US dollar was offered yesterday and was the chief driver of the market, sending the euro to its highest versus the greenback in more than two years. The break above 1.19 for EURUSD leaves bulls in control after two previous attempts failed. EURUSD eased back from these highs today but remains supported above 1.19 with bulls eyeing a recapture of the May 2018 swing high at 1.20.
GBPUSD was a little softer this morning after shooting clear of the 1.32 level yesterday to hit its best level since the election last December. The move clears important technical resistance of the long-term downtrend and opens a path back to 1.35, last year’s peak, with the golden cross (50-day SMA rising through the 200-day SMA) considered a bullish confirmation of the rally. Near term the higher-than-anticipated CPI inflation reading this morning has not been able to lift the pound, although it ought to help quell immediate speculation the Bank of England will resort to negative rates.
Meanwhile the pound remains exposed to significant headline risks this week. Brexit talks have not gotten off to the best start as the EU rejected British proposals for truckers’ access to the continent. I would anticipate that the longer this drags the more we see pressure come back on GBP. FOMC minutes tonight will be watched for any signs the Fed feels the need to lean even harder on rates. For now the dollar can’t seem to catch a bid with the dollar index now barely holding the 92 handle and the last line of defence before a return to the 80s sitting at 91.60 (the 78.6% retrace of the two-year uptrend) now firmly in view.
Oil prices slip ahead of OPEC+ meeting
Crude prices were a little lower this morning ahead of an OPEC+ meeting to review after touching a 5-month high yesterday on improving risk sentiment as US equities rose, whilst the softer dollar is offering ongoing support to commodity markets.
OPEC and allies are likely to stick with 7.7m bpd supply cut – what we don’t know is whether the demand side really picks up into the back end of the year. On that front a lot will depend on the containment and control of the virus in Europe – rising cases raises real risk that hamstrung governments simply revert to a wide lockdown and restrict movement again. Airlines and travel stocks will face a tough time.
Gold was softer after breaking back above $2k in yesterday’s volatile session. Near-term support appears to rest on the 23.6% retracement around $1980. Whilst bulls are still just about in control, their momentum is not what it was and we would prefer to see the next swing clear $2015 for the bullish trend to be fully reasserted. A further corrective move lower should still be considered a real possibility.
FX update: Pound blown off course by Frosty Brexit talks, euro tests 200-day line
Sterling got a smack and the euro pulled back from its highs of the day as Britain’s chief Brexit negotiator confirmed what we already knew; that UK-EU talks are not going very well at all. Whilst a classic last-minute EU fudge is still broadly anticipated by the market, the language from David Frost was not optimistic.
GBPUSD moved sharply off the 1.23 handle, turning lower to test 1.2250 before paring those losses. EURGBP pushed higher and looked towards the May 21st swing high at 0.90, a two-month peak. Undoubtedly sterling becomes increasingly exposed to headline risks around Brexit as we move out of the worst of the Covid-19 pandemic and back into the cut-and-thrust of negotiations.
Speaking to MPs, Frost said the EU’s current mandate handed to chief negotiator Michel Barnier is – in certain key areas – not likely to produce an agreement, adding that the EU must change its stance in order to reach a deal with the UK. He said that the policy enshrined in the EU’s mandate is not one that can be agreed by the UK. Interesting to see sterling come back a touch as Mr Frost said it’s still the early stages of talks and the UK is still setting out its position – this seems rather optimistic given the timelines previously mentioned.
Whilst we knew that there had been precious little progress in the latest round of talks, the language indicates the two sides are very far apart still. We should however note that adopting this tone is part of the game – the UK’s position remains to take a hard line and, with Mr Cummings still in place, I would think this will remain the case. When questioned, Mr Frost said he reports to the PM, not to Mr Cummings. Of course, we all know where the real power lies.
As previously noted time is running out fast for the talks and we become less sure that either side has the political will and capital to expend on this when dealing with the economic catastrophe of the pandemic. The EU focus is on sorting out a rescue fund that all members can sign up to. Political capital is being spent on that more readily.
Chatter around the Bank of England looking at negative rates is another weight on sterling right now. Indeed it’s a crossroads moment as we deal with a massive increase in government debt, run huge twin deficits and exit the EU whilst in the midst of the worst global recession since the 1930s. There are a lot of downside risks for GBP.
Chart: Pound under pressure: EURGBP moves up to test near-term resistance, GBPUSD drops sharply
Meanwhile, EURUSD also pulled back from its highs, before recovering the 1.10 handle. The euro had earlier moved higher and European equities extended gains after the European Commission laid out plans for an additional €750bn stimulus fund. Ursula von der Leyen set out plans to distribute €500bn in grants – as per the Franco-German proposals – with an additional €250bn in loans on top. She said this would take the EU’s total recovery fund to €2.4 trillion.
A German government spokesman said Berlin was happy the EU had taken up elements of the plans set out last week by Angela Merkel and Emmanuel Macron. Macron urged the EU to move forward quickly. But a Dutch official said budget talks would ‘take time’, indicating a still rather frosty approach to the rescue fund from certain corners – it’s far from a done deal.
Chart: EURUSD analysis
The EC plans took the cross through the 200-day simple moving average around 1.1010 but there was not an immediate follow-through and the Brexit chatter knocked it back before it retook the 200-day line. Bulls need to see a confirmed push above this to unlock the path back to 1.1150, the March swing high. Failure calls for retest of recent swing lows at 1.0880.
Macron and Merkel’s rescue fund: Europe’s Hamiltonian moment?
Germany and France have agreed to push for a €500bn EU fund to help member states combat the economic fallout of Covid-19. The proposal comes as EU leaders fail to reach a consensus over what form a rescue package should take.
Angela Merkel and Emmanuel Macron have backed the scheme to support the Eurozone economy, which would be in the form of grants not loans.
The stimulus will be funded by the European Commission borrowing money – ‘coronabonds’ in all but name. The EC could borrow money from capital markets on behalf of all EU nations, secured against the next seven-year budget. The debt would mature after 2027.
This is an important breakthrough for the EU and has been dubbed Europe’s ‘Hamiltonian’ moment, in reference to Alexander Hamilton, who federalised the debts of the various US states in 1790.
This week on Wednesday EU President Ursula von der Leyen will present her plans, which will build on the Franco-German proposal.
If the budget talks are successful it should lower risk premia on EU sovereign debt, lowering bond yields and offering succour to the euro as well as to European equity markets.
It would also mark a major step towards EU fiscal policy coordination and possible fiscal union.
Will Eurozone members agree to rescue grants?
But it needs consensus and agreement from all the members of the common currency. Leaders struggled to agree an emergency funding package back in April, and the issue of how to support the recovery once the health crisis had passed was left alone.
Some nations have argued that making any rescue funding into a loan means saddling more debt on member states, like Italy and Spain, that are already struggling with their existing liabilities.
The ‘frugal four’ – Austria, Denmark, the Netherlands, and Sweden – are not playing ball with the French and Germans, putting forward a counterproposal to the €500bn bailout fund.
The four countries said they would not agree to a mutualization of debt, nor an increase in the EU budget.
Budget talks over the next few weeks will be crucial to the Eurozone and its economy.
FX strategy: euro, pound push up as dollar offered on risk appetite return
The euro and Sterling were on the front foot on Tuesday, with cable stretching its advance to near a 2-week peak. Whilst the dollar was offered on a broad return of risk appetite, the euro also seemed to get some lift from the ECB, which is giving signals it’s ready to do even more.
Bank of France Governor Francois Villeroy de Galhau, a key member of the ECB’s Governing Council, told a conference on Monday that there is room for the central bank to act ‘rapidly and powerfully’.
Speaking to CNBC subsequently on Tuesday he said there is a need to be flexible with the current round of coronavirus asset purchases, suggesting that the ECB shouldn’t need to bound to capital keys that dictate how many government bonds it can purchase based on the size of each country’s economy.
The German Constitutional Court ruling earlier this month expressly stated that the capital key was essential to avoid distorting markets, so this could fuel further disquiet among those hawks who have been set against the ECB’s bond buying.
Meanwhile, we await to see whether the EU states can agree a fiscal response, with Denmark, Austria, Sweden and the Netherlands countering the Franc-German proposal for a €500bn bailout fund to be financed by the European Commission issuing bonds. The so-called ‘Frugal Four’ want only a short-term emergency scheme financed by loans.
EURUSD chart analysis
Prices are in recovery mode following a rejection of the lows yesterday at 1.0870. EURUSD extended to 1.09730 – with this high formed we can look to recover the 1.1020, the May 1st peak which could open up a breakout from the two-month range.
GBPUSD chart analysis
Meanwhile GBPUSD pushed up to a 2-week high at 1.23 after the 1.2160 support area held and we saw a push through the 1.2250 channel. A break to the upside calls for a return to 1.25/1.26 and the Apr double top highs. Failure to sustain the move beyond 1.23 calls for retest of the 1.2160 support and thence the swing low at 1.2080 comes back into focus.