CFD Markets News and Forecasts — 28-09-2020

FXStreet reports that economists at Natixis look at four tentative explanations for the preference for US equities over European equities.

“Stronger expected growth or a higher level of earnings per share in the United States than in the Eurozone would justify investor preference for US equities.”

“If long-term interest rates are low relative to long-term growth, then equity valuation should be expected to be high. From 2010 to 2013, the relative levels of interest rates and growth rates were more favourable in the United States than in the Eurozone. This has no longer been the case since 2014.”

“Tech companies have high growth and valuations and attract investors.”

“US companies issue bond debt to buy back their shares, which European companies do not do. This leads to expectations of higher earnings per share and indices, which attracts investors.”

• Using all tools in toolbox had significant impact 
• PEPP has been extremely efficient and helpful
• ECB is clearly far away from inflation goal
• Not complacent about being under inflation target
• Always prepared to deliver on mandate
• Says will be very attentive to all incoming info

• Stronger euro set to weigh on inflation
• Will carefully assess all incoming information, including developments in the exchange rate with regard to its implications for the medium-term inflation outlook
• ECB continues to stand ready to adjust all of its instruments

• We want to make sure that Withdrawal Agreement is implemented in full
• But those clauses are there, they’re in legislation, supported by House of Commons, as a safety net, if need be; and those clauses will remain in that bill
• PM Johnson has been clear that we need to see progress in trade talks
• We had a constructive meeting with EU's Sefcovic
• We both were clear with each other where we were still some distance apart but we were both also clear that we wanted to bridge that gap

U.S. stock-index futures rebounded on Monday following a four-week losing streak on Wall Street, as hopes of a global economic recovery increased after a report that industrial profits in China rose for the fourth straight month.

Global Stocks:

(company / ticker / price / change ($/%) / volume)

FedEx (FDX) upgraded to Buy from Hold at Deutsche Bank; target $318

• There remains much to be done
• We have consistently put forward proposals on fisheries and subsidies that we feel are straightforward
• If there is to be a deal, it has to come together in mid-October
• There is ability to have informal talks right up until the European Council

• Protocol on Northern Ireland must be implemented faster
• We maintain view that the Internal Market Bill would constitute extremely serious violation of Withdrawal Agreement
• All in all, today's joint committee meeting showed an urgent need to move into higher gear

FXStreet notes that the stakes are high and the result is far from clear in the US November elections. A Biden victory would drive EUR/USD higher, while his tax plans could cause some concerns amidst equity investors. On the other hand, a second term for Trump would be full of uncertainties, strategists at Nordea report.

“We think the race is much closer than the polls imply, and even if a Biden victory is the most likely outcome, such a scenario is far from a given. If Biden wins and the Democrats also take control of the Senate (the House is very likely to remain in Democratic hands in any case), we could expect to see European assets outperforming US ones and a higher EUR/USD.”

“A Trump victory coupled with a Republican-led Congress remains a viable scenario as well (around 30% probability). Trump would favour more tax cuts, deregulation and a more limited stimulus package. The Democratic House would probably block most of his plans, though Trump could push through some more deregulation using his presidential powers. Trump could quickly become frustrated by the inability to forward his domestic agenda, and could concentrate on trade policies instead. The trade war could escalate and his unpredictability could dent risk appetite longer out. Global trade policy would become even more uncertain, supporting the USD. EUR/USD would drop, especially if tariffs on European cars would return on his agenda.”

USD fell against its major rivals in the European session on Monday as investors' focus shifted to U.S. politics.  The U.S. Dollar Index (DXY), measuring the U.S. currency's value relative to a basket of foreign currencies, dropped 0.50% to 94.17.

The first presidential debate between U.S. President Donald Trump and Democratic candidate Joe Biden is scheduled to take place on Tuesday, September 29. Ahead of the first debate, Biden leads Trump by seven points nationally, based on an average of recent polls, according to RealClearPolitics. 

Market participants also digested the New York Times' report that President Trump paid just $750 in U.S. income taxes in both 2016 and 2017. 

Also weighing on investors' sentiment was a lack of confidence that the U.S. lawmakers would be able to approve another stimulus package before the presidential election on November 3 as well as growing worries that the economic recovery was slowing as many stimulus programs had expired. House Speaker Nancy Pelosi said Sunday that a stimulus deal is still possible.

FXStreet reports that Credit Suisse notes that USD/CHF maintains base above 0.9200/9212 to suggest further corrective upside with next key resistance at 0.9344.

“The corrective upswing in USD/CHF is still hovering around the 61.8% retracement of the July/September fall at 0.9289 for a short term pause to unwind its near-term overbought condition. With a small base in place and with daily MACD moving higher as well as outright positive, we remain of the view that further corrective upside is likely.”

“We see resistance initially at 0.9296, then 0.9302/09, ahead of a move to the back of the broken trend support at 0.9325/26, then 0.9344 – the 38.2% retracement of the entire March/August fall. Whilst we ideally look for this area to cap for the medium-term downtrend to then reassert itself, we note that the ‘measured base objective’ is seen slightly higher at 0.9398/9400.”

FXStreet notes that markets have been weak in September. The good news is that prices have corrected, with the S&P 500 now down about 10% from its August highs. But the bad news is that four specific risks are still hanging over the market and all are yet to be resolved. Andrew Sheets, Chief Cross-Asset Strategist at Morgan Stanley advises investors to remain patient. 

“Our economists and I think many others in the market had been assuming that the US would approve about $1 trillion of additional stimulus. But recent progress on this front has not been promising. And the emerging controversy over the fate of the US Supreme Court only further complicates this process. Indeed, it's very possible that ahead of the US election, Congress only has time to either pass additional stimulus, or confirm a new Supreme Court justice, but not do both. A trillion-dollar swing in economic support is, needless to say, a very big deal and has a large bearing on what the near-term economic outlook could look like.”

“History suggests that markets often struggle in the months leading up to a US presidential election, especially when the result looks uncertain or might be close.”

starting to rise again in Europe, while in the US 37 states now have R rates above 1.”

“It's been over four years since the original vote but the Brexit saga remains unresolved. And key deadlines are approaching over the next two months. Morgan Stanley's economists have recently raised their odds of a ‘no-deal’ outcome. The scenario that would create the most near-term market and economic uncertainty.”

FXStreet notes that the USD/JPY recovery is starting to lose momentum as expected and analysts at Credit Suisse continue to look for resistance at 105.82/92 to ideally cap further strength and for the risk to turn lower again for a fall back to 104.00. 

“USD/JPY strength is showing signs of stalling as expected ahead of resistance at 105.82/92 and with the 55-day average and downtrend from early June now also here we continue to look for this to cap and for the downtrend to ideally resume.”

“Support is seen at 105.24/24 initially, below which would now see a minor top complete to add weight to this view with support seen next at 105.09, then 104.88/83. Beneath this latter area should confirm the recovery may already be over with support then seen next at 104.40/37, then the 104.00 recent low.”

• We are making significant progress on trade deal with U.S.
• Japan trade deal shows UK is prepared to go beyond what EU was in areas like financial services
• Over time, our trade will shift away from EU

FXStreet notes that the USD has risen against Asian currencies recently but economists at HSBC doubt the greenback can rebound significantly. They believe fundamentals should play a bigger role for EM currencies, giving an edge to Asian currencies, in particular, the Chinese yuan. 

“As suggested by the latest ‘dot plot’, the Federal Open Market Committee (FOMC) is committed to keeping interest rates low for a long time under the new average inflation targeting framework. Meanwhile, the US election is approaching and the US Congress has yet to break the impasse in additional fiscal stimulus, so some market participants could be feeling nervous about being too overweight US assets.”

“We believe local factors should matter more for emerging markets (EM) currencies, namely the growth outlook and macro-policy settings that will shape whether capital inflows can increase. CNY resilience is supported by domestic reasons. China’s economic recovery is broadening out. If the growth indicators keep improving – soft and hard data – then this could broaden up preferences for EM currencies. For now, we emphasise the regional preference for Asian currencies, given the greater connectivity to China.”

• Says it will guide comprehensive financing costs significantly lower
• Will keep yuan exchange rate basically stable
• Will maintain long-term balance between economic growth and risk control

• We are not about to use negative rates imminently
• Sees the effective lower bound at 0.10%
• If you have negative rates in the toolbox, you are duty-bound to explore in more detail the operational considerations
• But there are real uncertainties and risks from COVID-19, U.S. election, Brexit
• Says he is particularly focused on labor market
• Need to also factor in Sunak's changes to UK job support into November forecasts
• Engagement with banks on negative rates will take time
• Our central case sees unemployment picking up "really sharply" this year
• More likely unemployment will peak above 7.5% than below, be slower to fall
• Risk is that households will be more cautious of COVID-19 rather than less
• We remain ready to act further if needed

• Plans to remove travel ban for 10 countries and regions that have a low number of new coronavirus infections from October
• Australia, Vietnam, New Zealand, Brunei, and Belgium will likely be included on the list
• Two-week quarantine, however, will be required upon return to Japan
• Will allow the entry of foreigners with permission to stay in the country for more than three months
• Is advancing negotiations with 16 countries and regions to resume business travel
  

FXStreet reports that Karen Jones, Team Head FICC Technical Analysis Research at Commerzbank, suggests that AUD/USD allows for a minor rebound on Monday ahead of as slide to the 200-day ma at 0.6774. In fact, the aussie is currently trading at 0.7041, up 0.20% on the day, after falling by nearly 0.30% on Friday to 0.7006 – its sixth straight consecutive decline. 

“AUD/USD sold off sharply last week and starts this week still under pressure and we look for a slide to the 0.6964, the 23.6% retracement. There is scope for this to extend towards the 200-day ma, the February high and mid-June low at 0.6778/74, which is expected to hold the initial test.”

NFXStreet reports that FX Strategists at UOB Group believes that USD/JPY could extend the upside on a break above the 106.00 level.

24-hour view: “USD traded between 105.22 and 105.69 last Friday, relatively close to our expected range of 105.25/105.75. The price actions offer no fresh clues and we continue to expect USD to trade sideways between 105.25 and 105.75.”

Next 1-3 weeks: “There is room for USD to edge higher but any advance is viewed as part of 104.75/105.75 range (narrowed from 104.25/105.75 previously). While a move above 105.75 would not be surprising, USD has to break 106.00 before a sustained advance can be expected.”

• If things continue, we will have tens of thousands cases a day like other countries
• But also set priorities and keep economy running
• That includes schools and kindergartens staying open

FXStreet reports that Howie Lee, Economist at OCBC Bank, notes that gold is likely to face further downside pressure, especially if the dollar continues to firm. XAU/USD has started the week trading listless around $1860.

“Gold broke below $1900/oz last week and bulls have not shown any inclination to buy on dips despite prices being at a two-month low.”

“With the dollar expected to continue strengthening in the current risk-off environment, the inverse correlation between gold and the dollar may push gold further down in the immediate future.”

FXStreet reports that in the opinion of FX Strategists at UOB Group, AUD/USD could extend the drop to the 0.6970 region in the next weeks.

24-hour view: “The combination of oversold conditions and waning momentum suggests further AUD weakness is unlikely. For today, AUD is more likely to consolidate, likely not straying much out of Friday’s range of 0.7006/0.7087.”

Next 1-3 weeks: “AUD subsequently cracked 0.7030 but it rebounded after touching a low of 0.7016. Slowing shorter-term momentum could lead to a couple of days of consolidation first. As long as the ‘strong resistance’ at 0.7180 is intact (no change in level from yesterday), the current negative phase still appears to have room to run. The next support is at 0.6970.”

• Global oil market has stabilised over the last few months
• Balance has been restored

GBP was mostly higher against its major counterparts in the Asian session on Monday. While the pound changed little against JPY, it rose against the rest of major rivals.

Market participants seemed to be rather immune to the latest reports that the UK might be heading for a no-deal Brexit in three months. The final - the ninth - round of trade negotiations begin between the EU and UK are set to start on Tuesday, September 29. Ahead of the talks, Ireland's Prime Minister Micheal Martin hinted that the EU and the UK were heading for a no-deal Brexit. He noted that the UK Internal Market Bill had eroded the trust between the two sides and revealed that the Irish government was preparing its budget in three weeks’ time on the basis that there would be a no-deal Brexit. "That’s the basis on which we’re preparing the budget and we’re warning and alerting businesses to that terrible reality", he added.

Investors also continued keeping the focus on the Covid-19 developments in the UK. The official data released on Sunday revealed that another 5,693 people in the country were tested positive for COVID-19, bringing the total number of coronavirus cases to 434,969. Meanwhile, the coronavirus-related deaths rose to 41,988, the highest number in Europe. Last week, the UK's Prime Minister Boris Johnson announced a raft of new restrictions to keep the second wave of infections. However, the Times reported that the government was preparing to enforce a total social lockdown across much of northern Britain and potentially London to fight the disease. The UK's junior health minister Helen Whately stated today that the government did not want tighter restrictions but keeping an eye on the virus infection rate.

FXStreet reports that in the opinion of FX Strategists at UOB Group, Cable might attempt a consolidative range ahead of potential extra downside in the next weeks.

24-hour view: “We highlighted last Friday that ‘momentum indicators are turning ‘neutral and expected GBP to ‘trade sideways within a 1.2700/1.2800 range’. GBP subsequently traded within a wider range than expected (1.2688/1.2805) before closing little changed at 1.2741 (-0.03%). The price action offers no fresh clues and GBP could continue to trade sideways for today, expected to be within a 1.2700/1.2810.”

Next 1-3 weeks: “GBP subsequently dropped to a low of 1.2676 but it has not been able to make further headways on the downside. Shorter-term momentum is beginning to ease and this could lead to a couple of days of consolidation first. As long as the ‘key resistance’ at 1.2830 is not taken out, another down-leg towards 1.2650 is still a distinct possibility.”

• Down from current forecast of -9.2%

FXStreet reports that according to FX Strategists at UOB Group, EUR/USD could attempt to break below the 1.1600 support.

24-hour view: “Our expectation for the ‘rebound in EUR to extend higher’ was wrong as it dropped to a low of 1.1611 before closing on a soft note at 1.1630 (-0.36%). Despite the relatively rapid decline, downward momentum has not improved by much. From here, there is room for EUR to probe the 1.1600 support but in view of the lackluster momentum, a sustained decline below this level is unlikely (next support at 1.1565).”

Next 1-3 weeks: “The negative phase in EUR that started more than a week ago is still intact. In our latest update from last Friday (25 Sep, spot at 1.1675), we held the view that the ‘outlook for EUR remains weak but the next support at 1.1600 may not come into the picture so soon’. While EUR subsequently dropped to a low of 1.1611, the decline appears to be running ahead of itself. From here, EUR could dip below 1.1600 but 1.1565 is expected to offer formidable support.”

Agenda of the ninth round of UK-EU Future Relationship negotiations