EU and US equities rallied yesterday, perhaps due to month- and quarter-end portfolio rebalancing. That said, today, focus is likely to fall on the first debate between Presidential candidates Donald Trump and Joe Biden. In the currency world, the pound was found among the main G10 gainers, following remarks by BoE Deputy Governor Dave Ramsden, as well as some optimism over this week’s Brexit negotiations.
Equities Rally Ahead of 1stTrump-Biden Debate
The US dollar traded lower against the majority of the other G10 currencies on Monday and during the Asian morning Tuesday. It gained only versus JPY, while it was found virtually unchanged against CAD. The greenback lost the most ground versus SEK, NOK, GBP, and CHF.
The weakening of the US dollar and the Japanese yen suggests that financial markets traded in a risk-on fashion at the start of this week. Indeed, looking at the performance in the equity world, we see that major EU and US indices were a sea of green. That said, the upbeat morale softened somewhat during the Asian session today. Japan’s Nikkei 225 and China’s Shanghai Composite gained 0.15% and 0.56% respectively, while Hong Kong’s Hang Seng slid 0.52%.
With no clear catalyst behind Monday’s rally in equities, we would consider this as the result of portfolio rebalancing at the end of the month and the third quarter overall. Energy and financials, which suffered the most from the economic downturn due to the fast spreading of the coronavirus, enjoyed the largest percentage gains among S&P’s major sectors, enhancing our view over month- and quarter-end rebalancing. Comments by US House Speaker Nancy Pelosi that stimulus talks with Treasury Secretary Steven Mnuchin are set to continue may have also prompted investors to buy equities. Remember that last week, headlines hit the wires that Democrats are working on a USD 2.2trln coronavirus-aid bill, that could be voted on this week, which suggests that the stalemate may end sooner than previously thought.
Having said all that though, with covid infections still rising at a fast pace, we are reluctant to call for a long-lasting recovery, as the case of another round of lockdown measures around the globe remains well on the table. The fact that we are just a month away from the US presidential election is another factor contributing to our cautious stance.
Speaking about the election, today, we have the first debate between Donald Trump and Joe Biden. In general, a Trump reelection may be positive for stocks, as a Trump win would keep the 2017 corporate tax cuts in place, with the President perhaps pushing for more infrastructure spending. Biden may result in a retreat in equities as he has called for an increase in taxes on corporations and high-income individuals. He is also expected to increase regulations on certain sectors and industries, including banks, energy, and healthcare. With all that in mind, the first debate may reveal if indeed this is investors’ thinking or not. In other words, we may get a first taste on how the markets may react on the election outcome.
Nasdaq 100 — Technical Outlook
Nasdaq 100 gained almost 2% during yesterday’s trading session. Looking at the cash index this morning, the price continues to climb higher, while trading above a short-term tentative upside support line taken from the low of September 24 th. However, in order to get comfortable with further advances, we would prefer to wait for a break above the key resistance barrier, at 11549, marked by the high of September 16 th. Until then, we will take a neutral stance.
A push above that 11549 barrier could allow more buyers to join in and send Nasdaq to the 11845 hurdle, marked by the high of September 4 th, which might provide a temporary hold-up. If so, Nasdaq 100 could correct back down a bit, but if it remains above the aforementioned upside line, the buyers may take advantage of the lower price and try to lift it up again. Another uprise could bring the index back to the 11845 zone, a break of which might clear the path for a move to the 12173 level, marked by the inside swing low of September 2 nd.
Alternatively, if the index breaks below the previously-discussed upside line and also slides below the 11238 hurdle, marked by the high of September 23 rd, that may spook the remaining bulls from the field, allowing more bears to run in. Nasdaq 100 might fall to the 11028 zone, marked by the inside swing high of September 24 th, where the rate could get halted temporarily. That said, if the sellers are still feeling comfortable, a break of that area might clear the way to the 10830 obstacle, or even the 10676 level, which marks the lows of September 21 stand 24 th.
GBP Gains on Interest-Rate Talk and Brexit Optimism
Back to the currencies, the pound was among the main G10 gainers, coming under strong buying interest after BoE Deputy Governor Dave Ramsden said that he and his colleagues are not about to use negative interest rates immediately. At their latest meeting, BoE policymakers noted that they are exploring how a negative bank rate could be implemented effectively, something that increased speculation over the adoption of sub-zero rates, perhaps as soon as at the upcoming gathering. With that in mind, Ramsden’s comments may have prompted some GBP-traders to scale back their negative-rate bets, and that’s why the pound rallied.
What may have also prompted traders to buy pounds may have been some relatively encouraging headlines with regards to this week’s round of Brexit talks. According to reports, a UK spokesperson said yesterday that although there are significant gaps between the EU’s and the UK’s positions, a final accord is still possible. This adds to the recent rhetoric that a breakthrough is possible, with one EU official noting that the deal is 90% there. Remember that the two sides agreed to find common ground before next month’s EU summit, at which any potential accord needs to be ratified. Thus, if we do see handshakes this week, the pound is likely to gain, while in case of no progress, it could fall back below 1.27 against its US counterpart.
GBP/JPY — Technical Outlook
The British pound popped higher yesterday, against most its major counterparts, including the Japanese yen. GBP/JPY is now trading above its short-term tentative upside support line drawn from the low of September 23 rd. Although the pair is showing willingness to move higher, to get a bit more excited with that idea, a break above yesterday’s high, at 136.23, would be required.
If, eventually, we do see a strong push above the 136.23 barrier, that will confirm a forthcoming higher high and might send the rate towards the 136.61 hurdle, or the 136.74 area, marked by the high of September 14 thand the low of September 9 threspectively. The latter level also coincides with the 200 EMA on our 4-hour chart, which may provide a small hold-up. That said, if the buyers are still willing to move GBP/JPY further north, a break of the 136.74 obstacle could open the door for a push to the 137.75 zone, marked by the intraday swing low of September 10 th.
On the other hand, if the rate break the aforementioned upside line and falls below the 134.82 zone, marked by the high of September 25 th, that could change the current direction of the short-term trend to the downside, potentially inviting more sellers into the arena. GBP/JPY may then slide to the 133.83 obstacle, a break of which might set the stage for a move to the 133.00 level, marked by the lowest point of September.
As for the Rest of Today’s Events
During the European session, we get Germany’s preliminary CPIs for September. The CPI rate is forecast to have declined to -0.1% yoy from 0.0%, while the HICP one is expected to have stayed unchanged at -0.1% yoy. This could raise speculation for Eurozone’s headline inflation, due out on Wednesday, to have stayed in negative waters as well.
In the US, the Conference Board consumer confidence index for September is coming out and the forecast points to an increase to 89.2 from 84.8. The API (American Petroleum Institute) weekly report on crude oil inventories is also coming out, but as it is always the case, no forecast is available.
As for tonight, during the Asian morning Wednesday, we get Japan’s preliminary industrial production, New Zealand’s ANZ business confidence index, and China’s official PMIs, all for the month of September. Japan’s IP is forecast to have slowed to +1.5% mom from +8.7%, while no forecast is available for New Zealand’s ANZ confidence index. China’s manufacturing PMI is anticipated to have risen fractionally, to 51.2 from 51.0, but there is no estimate for the non-manufacturing index.
We also have four Fed speakers on today’s agenda: Vice Chair Richard Clarida, New York President John Williams, Philadelphia President Patrick Harker, and Board Governor Randal Quarles.
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Originally published at https://www.jfdbank.com on September 29, 2020.