Markets today bounced back as stimulus talks have come back into question. The NASDAQ is up around 0.7%, while the S&P 500 and the Dow Jones were up 0.8% and 0.43%, respectively.
This is after the Market's fell around 1.4% a couple of days ago on Trump's tweet, stating that he has entirely stopped stimulus talks, saying Nancy Pelosi has been negotiating in "bad faith." However, Trump has slowly come back on the statement, as Trump allies believe it may have created the political risk he'd be blamed entirely for the economic fallout. He told Fox Business that he has reinstated talks about a stimulus bill and is now "starting to work out." "We started talking, and we're talking about airlines and we're talking about a bigger deal than airlines. We're talking about a deal with $1,200 per person, we're talking about other things."
The contested stimulus bill was between the Democrat's $2.4 Trillion dollar proposal versus the Republican's $1.6 Trillion dollar proposal. The Democrats have countered with $2.2 Trillion. However, the white house has not provided a counteroffer to that proposal. Nancy Pelosi is also pressing for language in the bill to limit Trump's ability to deliver virus testing and treatment funds to other projects.
Furthermore, we saw Brent Crude and WTI rise around 3.3% as energy companies on the Gulf coast evacuated 183 offshore oil platforms and halted nearly 1.5 million barrels per day as a safety precaution to Hurricane Delta. WTI and Brent are hovering around $41.25 and $43.32, respectively.
In the European markets, we saw the EUR/USD sell-off after ECB officials signaled that they were ready to ensure inflation moved towards their mandate, including slashing their already negatives rates and broadening their Targeted Longer-Term Refinancing Operations (TLTRO's), which stimulates banks to lend. EUR/USD is down around 0.2%.
BlackBull Markets are excited to introduce a new video series: Monday Meetings. This will be a weekly series in which we discuss in depth the movements of various markets throughout the week, featuring our expert analysts Andre De Almeida, Philip van den Berg, and Anish Lal.
Hosting this brand new series is Kyle Quindo. Watch the video here, and read Kyle's summary of this week’s discussion below:
The Euro only continues to drop lower and lower. When we looked at the EUR/USD pair on the 7th, it was at a 4-month low. When we revisited it just under a week ago, it had managed to hit a low not reached since April 2017. And now the Euro has dropped further still, sinking below the 1.0800 mark. It seemed to recover slightly, but has now dropped back down, leading to a 34-month low.
We predicted that the popularity of the Euro and Dollar pair amongst carry traders could cause the Euro to drop further, and it appears to have become a reality.
However, there appear to be new factors affecting this fresh low, including the German ZEW survey which was released. Standing for Zentrum für Europäische Wirtschaftsforschung, which translates to Center for European Economic Research, the ZEW indicator is a monthly release which measures the economic sentiment regarding Germany from approximately 350 economists and analysts.
Simply put, the it measures the number of analysts which predict a bullish vs bearish economy for Germany in the next 6 months, and then translates that to a number.
February’s ZEW had the Economic Sentiment Index drop to 8.7, vs the 21.5 that was predicted before the release, and far below the 26.7 of the last release.
ZEW President Professor Achim Wambach attributed this extremely low figure to the impact of the coronavirus, which has now passed 2,000 deaths.
As the Euro continues to drop, Gold continues to trend in the opposite direction. The classic safe haven asset is thriving in a global economy currently filled with uncertainties and global risks. Throughout the day it managed to rocket past the 1,590 mark all the way to 1,605, undoubtedly also fuelled by continuing fears of the coronavirus. Despite the number of cases and deaths reported starting to lessen, the WHO warns that there is not yet enough information to say if the epidemic has actually slowed down.
The question now is whether the Euro has the potential to continue this bearish trend and drop even further. This is what Anish Lal at BlackBull Markets had to say:
“Euro shorts triggered all the way until sub 1.08s with bears weighing in heavy on this trade. With positive carry and negative yields, there is no incentive to hold the Euro for investors at present, especially as recent poor data prints continue to provide stimulus for more sells. The EUR/USD has now covered a key gap formed in April 17 and this could either hold as support, or we could likely see a trend continuation. The 1.08 is a key level to watch. Meanwhile, Gold pushes higher, aiming to smash through new yearly highs past $1,611 with eyes on global risks. Despite equities being stable, markets also have an election to look forward to, which could make investors more risk averse - and resulting in a higher Gold for 2020.”
When we last looked at the EUR/USD, it was at a 4-month low, and since then it has continued to fall. Over the past few days the Euro was at its lowest at 1.08660 against the US dollar, a low not seen since April 2017.
This downward trend for the Euro is most likely a result of a rise in carry trading in the forex markets.
Carry trading works by picking two currencies which have a large difference in interest rates and buying the one with the higher rate, and then selling the lower. You are then also paid for making the overnight trade in swaps.
The current lack of volatility in the markets is due to Central Banks deciding to keep interest rates the same. The Federal Reserve has set the interest rate for the USD at 1.75%- the highest amongst the currencies, tied only by the CAD, while the European Central Bank has the Euro at -0.50%.
Usually, a lack of volatility means less trade, but due to the favourable difference in interest rate between the US dollar and the Euro, investors have increasingly looked towards carry trading to make short term profits.
And as a result of the Euro being sold off, it has dropped continuously since the start of the month, leading to an almost 3 year low.
While there are other currency pairs with a favourable interest rate difference, EUR/USD is by far the most traded currency pair, which also makes it the most popular carry trading option. This is most likely why the Euro has dropped so hard compared to other currencies.
However, carry trading is by no means risk free and guaranteed profit. It is an attractive option at the moment due to the lack of volatility in the market, but crises such as the coronavirus still pose a threat to the current stability.
“The EURUSD broke a new yearly low today following 8 days of pressure from short sentiment. The green zones represent areas of support and the lowest zone is supported by prices from September 2019 lows at 1.087. Prices seem to be hesitant around this zone and should the daily candle close below this area, we could well see the market head to 2017 May lows of sub 1.08. “
– Anish Lal, BlackBull Markets.
Watch Anish's video on the EUR/USD here:
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As we come to the end of the week and approach the biggest trading day of the month, aka the Non-farm payroll (NFP) release in less than 24 hours, investors seem to be pricing in a stronger US dollar ahead of strong expectations for the US economy. As a result, the Euro has fallen to its lowest since October 2019.
The EUR, which was trading steadily at the 1.10000 mark for the past two days, is now averaging 1.09775 after falling to a 4-month low of 1.09660, following the release of another US national employment report, the ADP.
ADP, which stands for Automatic Data Processing, is a research institute which releases a monthly data report showing the employment situation in the US for the previous month. Similar to the NFP, it also measures the number of jobs in the given month, but only for private sector jobs. While the NFP measures the total number of jobs, in both public and private sectors. Therefore, it is usually seen as a precursor for the NFP, and a good indicator of how the bigger report will turn out.
This month’s ADP report saw the total number of private sector jobs at 291,000 in January, a significant increase from the previous month of 199,000. This is the largest increase in 4 years, and was well above forecasts.
Today’s analysis on the Euro was done by Mr Anish Lal here at BlackBull Markets, who had this to say:
“The Euro continues to feel the pressure, trading near a 5-month low, as ominous domestic data carries the bears lower. Meanwhile, positive Jobs data from the Private sector has helped equities and the US dollar to remain bid, with a continuation of the trend putting prices sub 1.0950 in play on the Euro vs US dollar.”
United States ADP Employment Change and the effects
On this Wednesday (October 2), the latest US ADP reported that 135 thousand workers were employed in private business in the United States in September. It is less than market expectations, which makes the market more worried about the strength of the US labour market and the overall economy. There are more and more signs that the labour market is slowing. As these figures are announced, people are increasingly worried about the strength of the US economy.
Also, Data released by the Institute for Supply Manufacturing (ISM) on Tuesday showed that manufacturing is shrinking that US manufacturing activity fell to a minimum of more than ten years last month. However, the rate of contraction is not consistent with the recession. US manufacturing activity fell to a minimum of more than ten years last month, raising concerns about the economy. However, other economic data is relatively healthy, especially in the consumer sector.
After the data was released, the financial market volatility intensified.
the US dollar index is lower, which fall about the 99 marks.
Spot gold has pulled up nearly 20 US dollars in a short-term, breaking through the 1,500 US dollar/ounce mark.
The three major stock indexes of US stocks fell. The situation is particularly fierce. The Dow Jones index fell more than 300 points; the S&P 500 index fell 1.2%, the most significant one-day drop since August 23.
After the close in London, EUR / USD rose and challenged the 1.0960 resistance. The level of buyer defeat is 1.0960 resistance, then 1.0985.
According to the daily chart, the bear market trend for shared currencies is lower than the main daily Simple Moving Average (DSMA). Disappointing ADP and worth performance of the ISM triggered negative sentiment in the dollar and the market.