EU and US equities add some more gains, perhaps as Monday’s positive news over the approval of Pfizer’s vaccine allowed market participants to continue adding to their risk exposure. However, Asian stocks tumbled, perhaps due to the central bank of South Korea hiking interest rates. In any case, EU and US gains were relatively contained proving our point for a cautious stance as we get closer to Fed Chief Powell’s speech at the Jackson Hole Economic Symposium.
EU and US Shares Gain Somewhat, Asian Ones Tumble
The US dollar traded lower against most of the other major currencies on Wednesday and during the Asian session Thursday. It gained slightly only against JPY and CHF, while it was found virtually unchanged versus CAD. The greenback underperformed against AUD, NZD, GBP, and EUR in that order.
The weakening of the US dollar and the other safe-havens yen and franc, combined with the strengthening of the Aussie and Kiwi, suggests that the financial community largely continued to trade in a risk-on manner. Turning our gaze to the equity world, we see that, indeed, this has been the case, but up until the Asian trading. The only exception was Germany’s DAX, which may have slid after the expectations index of the Ifo survey slid by more than expected, underscoring companies’ concerns for the coming months due to rising coronavirus infections. During the Asian trading today, the picture was turned upside down, perhaps after South Korea became the first developed economy to hike interest rates during the pandemic. This may have been a signal that more developed nations may soon start withdrawing the support introduced for defending their economies from the coronavirus-related hits. In any case, recently, Asian stocks have been underperforming their EU and US peers, perhaps due to concerns over tight regulations in China, as well as the fast spreading of the coronavirus across the continent.
EU and US shares may have continued to trend north, perhaps due Monday’s positive news on Pfizer’s vaccine approval. However, as we’ve been repeatedly highlighting this week, investors were likely to become more cautious as we get closer to the Fed’s annual Economic Symposium, and the modest gains prove just that. Now investors will be eager to find out whether Fed Chair Powell will announce a clear plan and timeline with regards to QE tapering. Expectations over a formal announcement and a start as early as next month have been high – at least until last week – due to stronger than expected employment and inflation data, but also due to the minutes of the latest meeting revealing that officials largely anticipate the process to begin this year.
However, on Friday, Dallas Fed President Robert Kaplan said he might reconsider his hawkish stance if the virus hurts the economy, while on Monday, data showed that business activity in the US slowed for a third straight month due to the virus spreading. This may have lessened confidence that Powell will provide a clear QE-tapering timeline. Even if he does, many believe that he may refrain from rocking the boat and perhaps announce only a cautious tapering, perhaps a start in December and a reduction pace of USD 10bn. Bearing in mind that the Fed is currently buying USD 120bn worth of asset purchases, this means that the full process would take a full year, something that could result in later rate hikes as well. Now, in case he refrains to provide a clear roadmap – a scenario we see as the most likely – , incoming employment and inflation data may become even more important, as they could prove determinant on how the Fed will act at its upcoming gatherings.
DJIA – Technical Outlook
The Dow Jones Industrial Average cash index traded slightly higher yesterday, but hit resistance at 35500, and today in Asia, it retreated somewhat. Overall, the index continues to trade above the upside support line drawn from the low of June 21st, and thus, even if we see some further retreat, we will class it as a corrective move before the next leg north.
A dip below 35280 could confirm the case for further correction, but the bulls may take charge from near the 34992 barrier, marked by the inside swing high of August 19th. This may encourage advances towards the record peak of 35630, hit on August 16th, the break of which would take the index into the uncharted territory and perhaps trigger advances towards the round figure of 36000.
In order to start examining a bearish reversal, we would like to see a dip below the low of August 19th, at 34565. This will confirm a forthcoming lower low on the daily chart, while the index will be already below the aforementioned upside line. We could then experience declines towards the 34115 level, marked by the low of July 8th, the break of which could carry extensions towards the 33740 territory, marked by the low of July 19th.
USD/JPY – Technical Outlook
USD/JPY edged north yesterday, but the advance was stopped near the 110.12 level. The pair continues to balance above the upside support line drawn from the low of August 4th, but in order to get confident on larger advances, we would like to see a break above 110.23, which is the high of August 19th.
This will confirm a forthcoming higher high on both the 4-hour and daily charts and may initially pave the way towards the high of August 12th, at 110.55, or the peak of August 11th, at 110.80. If the bulls are not willing to stop there, then a break higher could see scope for larger extensions, perhaps towards the peak of July 5th, at 111.18.
The move that could make us start examining the bearish case may be a dip below 109.52. This could also signal the break below the pre-mentioned upside line and may open the path towards the 109.12 barrier, marked as a support by the lows of August 16th and 17th. Another beak, below 109.12, may allow the bears to dive towards the low of August 4th, at 108.73.
As for Today’s Events
An event that may attract some attention today may be the minutes of the latest ECB meeting. At that meeting, the Bank kept all of its settings untouched and changed its forward guidance, saying that it will keep interest rates at present or lower levels until it sees inflation reaching 2% well ahead of the end of its projection horizon, which may also imply a period during which inflation moderately overshoots that objective. This translates into willingness to hold rates low for much longer than the previous guidance suggested. With that in mind, we don’t expect to get any major new information from the minutes, but we will look for any possible hints with regards to officials’ plans over their asset purchase program beyond March, the current planned end date.
We also get the second estimate of the US GDP for Q2, which is expected to be revised up to +6.7% qoq SAAR from +6.5%, and the initial jobless claims for last week, with the forecast pointing to a fractional increase. That said, with all eyes locked on the Fed’s Economic Symposium, we see the case for this data to receive little, if any, attention.
We also have one speaker on today’s agenda, and this is ECB Executive Board member Isabel Schnabel.
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