Equities Turn South Ahead of US-China Talks

Most major equity indices slid on Thursday, with some investors liquidating positions as the Trump administration and Congress Democrats in the US remain deadlocked over a new coronavirus-aid bill. They may have also been nervous due to tomorrow’s talks between top US and Chinese officials with regards to the Phase One trade accord agreed between the two nations.

EQUITIES SLIDE ON DEADLOCKED US STIMULUS TALKS, US-CHINA TALKS RESUME

The US dollar traded mixed against the other G10 currencies on Thursday and during the Asian morning Friday. It gained against NZD, AUD, SEK and JPY in that order, while it underperformed versus NOK, CAD and CHF. The greenback was found nearly unchanged against EUR and GBP.

The weakening of the commodity-linked currencies Aussie and Kiwi suggests that risk appetite softened again, but the fact that the yen was also among the losers suggests otherwise. Thus, in order to get a clearer picture with regards to the broader market sentiment, we prefer to turn our gaze to the equity world. There, major EU indices were a sea of red, with the FTSE 100 sliding the most due to an early jump in the pound as well as declines in AstraZeneca, BP and GlaxoSmithKline, which traded without entitlement to a dividend payout. The negative morale rolled over into the US session, but much softer, perhaps due to a larger-than-expected decline in the initial jobless claims for last week. Both the Dow Jones and the S&P 500 slid 0.29% and 0.20% respectively, with the latter hovering near its all-time peak, but Nasdaq was up 0.27%, perhaps as investors preferred to turn back to markets that have remained resilient during the pandemic crisis, like the technology sector. Sentiment improved somewhat during the Asian session today, with Japans Nikkei, China’s Shanghai Composite, and Hong Kong’s Hang Seng gaining 0.11%, 0.41%, and 0.27% respectively. The exception was South Korea’s KOSPI, which tumbled 1.22% as South Korean authorities reported the largest number of new coronavirus infections since March.

On top of all that, what may have also prompted some investors to liquidate their positions may have been the fact that the Trump administration and Congress Democrats in the US remain deadlocked over a new coronavirus-aid bill. Following the new flare up in tensions between the US and China, investors may have also been nervous due to tomorrow’s talks between top officials with regards to the Phase One trade accord agreed between the two nations. With that in mind, we repeat that for investors to increase their risk exposures again, US Democrats and Republicans may have to agree over a new fiscal package, and US and Chinese officials may need to provide encouraging remarks over their nations’ trade relationship.

Back to the currencies, the Kiwi and the Aussie were the main losers, as apart from the overall risk-off trading, RBNZ’s Chief Economist Yuong Ha and RBA’s Governor Philip Lowe stated that they would prefer a weaker local currency. Our view remans that, as risk-linked currencies, the direction of both is likely to stay mostly dependent on developments surrounding the broader market sentiment. However, with the RBNZ expanding its bond purchases this week and opening further the door to negative interest rates, we expect the Kiwi to continue underperforming its Australian counterpart. In other words, we expect AUD/NZD to continue drifting north. Remember that in contrast with the RBNZ, the RBA has repeatedly said that 0.25% is the effective lower bound for its benchmark interest rate.

DJIA — TECHNICAL OUTLOOK

The Dow Jones Industrial Average cash index has been trading in a rising mode since August 5th, when it broke the upper end of a triangle formation that contained the price action since June 9th. The index hit resistance at 28185 on Tuesday, but although it may correct somewhat lower in the days to come, as long as it remains above the 27175 territory, which provided strong resistance on July 15th and 23rd, we would consider the broader picture to still be positive.

If the index retreats and the bulls manage to take charge from near the 27175 zone, we would expect to see another test near the 28185 area, which also provided decent support on January 8th and 31st. That said, if the bulls are strong enough to overcome that barrier, the advance may extend towards the index’s all-time peak, at 29583.50, hit on February 12th.

Now, in order to start examining the bearish case, we would like to see a clear dip below the 26000 territory. This will also take the price below the lower end of the aforementioned triangle and may initially pave the way towards the 25000 zone, which acted as a support between May 29th and June 29th. Another break, below 25000 may encourage the bears to put the 24120 zone on their radars. That zone is marked by the lows of May 19th and 22nd.

AUD/NZD — TECHNICAL OUTLOOK

AUD/NZD traded higher during the Asian morning Friday, breaking above the 1.0920 hurdle, marked by the peaks of Wednesday and Thursday. Overall, the pair has been printing higher highs and higher lows above a short-term uptrend line since July 10th and thus we would consider the near-term outlook to be positive.

The break above 1.0920 confirmed a forthcoming higher high and, in our view, it may have opened the path towards the psychological zone of 1.1000, which acted as a strong resistance between September 5th and October 9th, 2018. The bulls may decide to take a break after hitting that hurdle, thereby allowing the rate to correct lower. Nonetheless, as long as it stays above the aforementioned upside line, we would see decent chances for the bulls to jump back into the action and drive the battle back up for another test near 1.1000. If they manage to break through that hurdle this time around, we may see them extending the uptrend towards the 1.1055 area, which is marked as a resistance by the peak of August 21st, 2018.

On the downside, a break below 1.0800 may be needed for signaling a trend reversal. The rate would already be below the current uptrend line and the bears may decide to dive towards the 1.0720 obstacle, which provided support on July 30th and August 3rd. Another dip, below 1.0720, may set the stage for declines towards the low of July 27th, at around 1.0670.

AS FOR TODAY’S EVENTS

During the European morning, Eurozone’s employment change and the second estimate of the bloc’s GDP, both for Q2, are coming out. No forecast is available for the employment change, while the second GDP estimate is expected to confirm the initial forecast of -12.1% qoq.

Later, from the US, we get retail sales for July, industrial production for the same month, and the preliminary UoM consumer sentiment index for August. Both headline and core sales are forecast to have slowed to +1.8% mom and +1.6% mom from +7.5% and +7.3% respectively, while industrial production is anticipated to have slowed to +3.0% mom from +7.2%. The UoM consumer sentiment index is expected to have declined fractionally, to 72.0 from 72.5.

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Originally published at https://www.jfdbank.com on August 14, 2020.