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Market Report – Risk appetite deteriorated over the global recovery as US and European coronavirus cases increased.

Posted: 16th October 2020

Trade ideas & Daily market report October 16th 2020

Market highlights.

EUR/USD

Italian industrial sales increased 5.9% in August with the year-on-year decline slowing to 3.8% while orders increased 15.1% to give a 6.1% annual increase. The Euro was unable to make any headway and gradually lost ground as markets fretted over increased coronavirus cases in the Euro-zone area.

US initial jobless claims increased to a 2-month high of 898,000 in the latest week from a revised 845,000 the previous week and above consensus forecasts of 825,000. Continuing claims declined to 10.02mn from 11.18mn previously and well below expectations of 10.70mn. There was, however, a sharp increase in the number of claims under the pandemic emergency compensation programme and further distortion from the California data.

The New York Empire manufacturing index declined to 10.5 for October from 17.0 previously and below consensus forecasts of 15.0. There was stronger growth in new orders for the month while unfilled orders declined at a slower rate. The Philadelphia Fed manufacturing index strengthened sharply to 32.3 for October from 15.0 and well above consensus forecasts of 14.0. There was strong growth in new orders and smaller increase in unfilled orders. Expectations surrounding the 6-month outlook were slightly weaker in New York, but more optimistic in Philadelphia. The overall data impact was limited, but with reservations over the claims implications.

ECB President Lagarde reiterated that the governing council will carefully assess all incoming information including developments in the exchange rate. She also repeated that headline inflation was likely to turn positive from early 2021. The dollar gained fresh demand as equity markets retreated. Underlying Euro sentiment remained negative with a EUR/USD dip to just below 1.1700. There was little change on Friday with the dollar close to 2-week highs and EUR/USD just below 1.1700.

USD/JPY

Risk appetite deteriorated ahead of Thursday’s New York open with US equity futures moving sharply lower and the Japanese yen gained fresh support. The dollar also secured an element of defensive support which curbed losses against the Japanese currency, although it drifted lower.

There was further uncertainty over a US fiscal stimulus as contradictory rhetoric continued. There were some suggestions that Treasury Secretary Mnuchin and House Speaker Pelosi were holding further talks, but there was little evidence of significant headway. There was also little of substance in the town-hall debates held by Presidential candidates Biden and Trump. USD/JPY was able to hold above the 105.00 level and settled just below 105.50 as narrow ranges prevailed.

Risk conditions were subdued in Asia with an underlying fragile tone surrounding as unease over the global economic recovery intensified despite evidence of recovery in Asia. USD/JPY settled around 105.25 as the yen continued to gain an element of defensive support.

Sterling

The EU confirmed that it would continue Brexit talks over coming weeks, but the position hardened slightly with no move to intensify talks. UK Chief Negotiator Frost returned from Brussels and reported back to the Prime Minister. A spokesman for Johnson stated that the UK would reflect on the outcome of the EU Council before setting out the UK’s next steps. There were further and consistent calls from EU Leaders that the UK needed to take further action to break the impasse.

After the European close, Frost stated that the UK was disappointed by the EU statement and rejected that all concessions needed to come from the UK side. Sterling was also unsettled by further concerns over coronavirus developments with further areas of the UK, including London, placed into the high alert level. As well as damage to the economy, there was unease over the impact on the budget deficit, reinforcing expectations of further Bank of England action.

GBP/USD dipped to 1.2900 amid the firmer dollar while EUR/GBP secured limited net gains to the 0.9060 area. The government will set out its reaction and approach to trade talks on Friday and Sterling will slump if there is any move to pull out of talks. Overall global risk appetite remained fragile which also hampered Sterling and GBP/USD traded below 1.2900 with the Euro around 0.9070 as markets braced for further volatile trading during the day.

Swiss franc

The Swiss franc continued to make net gains on Thursday with EUR/CHF dipping to below 1.0700 for the first time in 3 months. The dollar was unable to make headway despite the robust tone elsewhere and USD/CHF was held below 0.9150 during European trading.

The franc gained an element of support from weaker equities, although there was also speculation that the National Bank would limit intervention over the medium term. Overall risk conditions remained fragile, although EUR/CHF crawled above 1.0700 on Friday with USD/CHF around 0.9150.

AUD/USD + USD/CAD

After retreating sharply overnight, the Australian dollar remained under pressure into the New York open as equity markets remained under pressure and the US dollar secured net gains. AUD/USD dipped to lows just above 0.7050 before a recovery to 0.7090 as US equities rallied from worst levels.

There was selling interest on approach to 0.7100 and AUD/USD drifted to around 0.7075 amid fragile risk appetite and further strong speculation that the Reserve Bank would ease monetary policy at the November meeting.

The Canadian dollar dipped sharply on Thursday amid weaker risk conditions and a stronger US currency. After out-performing in recent sessions, the currency dipped sharply with USD/CAD peaking around 1.3260 before fading.

The Canadian dollar was able to demonstrate some resilience with USD/CAD around 1.3225 on Friday.

NOK+ SEK

Risk conditions dominated Scandinavian currencies during Thursday with reservations over the European recovery also important.

The Norwegian krone lost ground, especially as oil prices also lost ground. EUR/NOK strengthened to highs at 11.00 before a retreat to 10.95.

EUR/NOK traded around 10.98 on Friday with USD/NOK around 9.38.

The Swedish krona also lost ground into the New York open amid a dip in equities with EUR/SEK strengthening to 10.41 before a retreat to 10.38. The pair traded just below 10.40 on Friday with USD/SEK around 8.88.

Equities

Euro-zone equities moved sharply lower in early trading as risk appetite soured. There were also further concerns surrounding European coronavirus developments and unease over the recovery outlook.

The German DAX index declined 2.5% with all major bourses posting notable losses, although Spanish IBEX losses were held to 1.4% as coronavirus cases slowed.

Major UK stocks moved sharply lower amid unease over further coronavirus restrictions, especially with London moving into a higher alert tier. Global developments were unfavourable and earnings fears persisted. A weaker Sterling tone provided some relief with a 1.7% decline for the FTSE 100 index.

US equities opened lower as the jobless claims data failed to provide relief. There were also further doubts over fiscal developments, although indices gradually recovered with S&P 500 index losses around 0.15%.

US futures were little changed on Friday and Asian bourses overall remained on the defensive.

Japan’s Nikkei 225 index declined 0.35% with a 0.5% retreat for the Australian ASX index amid fragile risk conditions.

China’s Shanghai index traded marginally higher in late trading with a stronger 0.7% advance for Hong Kong’s Hang Seng index on local earnings hopes.

Commodities

Oil prices lost ground on Thursday, although crude was broadly resilient given the slide in equities and a firm US dollar. There were still underlying reservations over demand conditions.

EIA data recorded a draw in crude inventories of 3.8mn for the latest week and there was a decline in gasoline stocks, although both figures were relatively close to consensus expectations.

WTI overall retreated to just below $41.0 p/b and retreated to near $40.50 on Friday as global risk appetite remained fragile with Brent around $42.70 p/b.

Precious metals moved lower when equities declined and the dollar secured net gains, although metals were broadly resilient with gold finding support close to $1,890 per ounce and moved back above $1,900 as equities rallied. Silver found some support below $24.0 per ounce.

Gold edged higher to near $1,905 per ounce on Friday, although buying interest remained subdued with silver around $24.15 per ounce.

Cryptocurrencies

Trends in global risk appetite remained an important influence on cryptocurrencies during Thursday.

As equities came under pressure, bitcoin declined to lows below $11,300.There was, however, a recovery later in the day with bitcoin rallying to near $11,500.

Volatility spiked higher in Asia on Friday even though wider markets were relatively calm. Bitcoin spiked lower to near $11,200 before a recovery to near $11,350.

Ether also dipped to test the $370 area before a recovery to around $378. The bitcoin slide triggered losses to near $365 before a correction to $370.

Calendar

Major events for the day ahead: (times in BST)

13.30: US retail sales

15.00: US University of Michigan consumer confidence

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