Like waiting for the Toronto transit bus to arrive in the middle of a blustery winter storm, both pleasant and lousy news often comes in pairs (that may be a joke better suited for Torontonians…).
First, the US is considering new tariffs on USD3.1 bn of goods from France, Germany, Spain and the UK, starting a month-long public comment period ending July 26. Second, rising daily Covid-19 cases are clearly in the market's sights, with Texas a particularly keen focus. This Texan scenario supersedes all other risks as the fear of a super spreader is far more market impactive than placing tariffs on French wine and cheese.
On US-EU trade, it’s worth noting the US administration's proclivity to walk-back trade frictions.
Recent history suggests the President can and will react to negative news that adversely impacts the stock market, and which is within the White House control. By contrast, whatever stems from the negative market impact of rising Covid-19 cases is difficult for policymakers to control.
A huge problem for investors is that volatility is too expensive to buy right now, so they’re finding it easier just to cut and run from their stock market positions.
But with Covid-19 back in play and policymakers continuously in markets since March, the potential impact of emerging downside risks to asset prices could be viewed through the influential lens of how central banks and governments have in reversing them.
While the US administration has been discussing another potential stimulus plan with Republican members of Congress, transfer payments are more of an anti-depressant than a stimulant; it’s time to bring out the big infrastructure guns to address the spare capacity built up in economies and labor markets.
I‘m finding it extremely difficult to hold a consistent view within the running Covid narrative.
Sure, concerns are rising about the surge of Covid-19 cases in some major US states; even though case counts are growing in Texas, California and Florida, the mortality rate is falling. That suggests the rise in cases is down to more testing and hasn’t translated into higher mortality. Then again, the mortality rates often lag by a week or two, so we seem to be caught at the moment with case counts rising in this seemingly endless feedback loop.
Cautious comments from the ECB's chief economist Lane, –as well as confirmation of additional tariffs from the US on EU and UK goods – have been bad for trader sentiment. The market felt heavy from the start of the week with month-end supply beginning to weigh., but investors’ sanguine views giving way to fears of an uptick in coronavirus cases undoubtedly has the makings of being a very gnarly month-end rebalancing proposition.
On a positive regional note, on Wednesday China said it would expand the number of sectors open to foreign investment, relaxing international ownership caps on brokerages, futures companies and life insurance firms. The scaling back of the so-called negative list is part of its efforts to open up the economy further and improve its business environment amid the Covid-19 pandemic.
Equities traded off the highs overnight as concerns over a second wave resurfaced with several US states reporting a fresh spike in Covid-19 cases. Broad USD strength ensued as risk aversion developed. EURUSD price action remains choppy with momentum in one time zone often sharply reversed in another.
G-10 trading generally remains constructive on the single currency in the medium term but expect calendar-related flows to increasingly impact the price action into month/quarter-end. I'm biased to sell rallies on the day. Support is likely into 1.1200, followed by 1.1150-70.
USDJPY has been under pressure over the past few sessions with speculation of a sizeable one-off flow behind some of the moves. The pair got a boost overnight from broad USD strength as some of the recent selling pressure appeared to have lightened. On the day, fade strength, reassessing on a daily close above 108.25. Support is likely into 106.40-50 ahead of 106.00.
In AUDUSD, look to fade strength on the day, with resistance likely into 0.6900 ahead of 0.6960-80 and support at 0.6835, followed by 0.6800. The market remains flexible, watching equities for signs of continuation or stall in momentum. Medium-term, the market appears biased to buy dips.
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