USD is growing despite the uncertain situation with new financial stimuli for the American economy. Negotiations stalled again over the weekend, despite a significant increase in spending (to $1.8 trillion) in the new support package. The Democrats were not satisfied with the distribution of these funds, and the package was rejected. The Trump administration is now calling on Congress to vote separately on certain items of the bailout plan, in particular, the small business aid program and the payroll protection program. The chances of a deal being concluded before the presidential election are seriously diminishing, although most economists, including Fed Chairman Jerome Powell, recognize their need for economic recovery.
Today’s Bull Driver – Investors remained positive over stimulus and were rewarded on Friday by reports the White House had offered a $1.8 tln package (according to people familiar with the deal). In comments on Rush Limbaugh’s radio show, he said “I would like to see a bigger stimulus package than frankly either the Democrats of Republicans are offering…I’d like to see money going to people.”
Key Market Drivers This Week
- Markets jumpy on U.S. stimulus uncertainties, election jitters, virus, lockdowns, Brexit: (Bullish Driver) A “Stimulus Agreement” would likely cause the market to jump up and breakthrough resistance.
- Q3 earnings season kicks off with big banks, including Citigroup, BoA, Wells Fargo: (Bullish Driver) We think that earnings and outlook should be positive or better than expected because companies typically leak negative reports a few weeks in advance.
- Fedspeak includes VCs Clarida, Quarles; Barkin, Daly, Kaplan, Kashkari, Williams: (Bullish Driver) It is expected that the Fed will make positive statements and saying they are monitoring the markets but not expected to infuse anything more unless needed.
- The Treasury market closed Monday for Columbus Day; Canada closed for Thanksgiving
- Attention turns to U.S. data on retail sales, production, consumer sentiment, CPI
- China trade, CPI, PPI; Japan machine orders, production; Bank Indonesia seen steady
- ECB laying groundwork for change in inflation target, extension of PEPP program
- Brexit October 15 summit looms, can the EU and UK compromise
- German ZEW economic sentiment, HICP; Eurozone CPI data due
Oil prices are falling moderately today. Quotes are under pressure from a complex of negative factors. First of all, the next failure of the stimulus negotiations for the American economy creates a threat of additional pressure on the demand for oil products. Also, the end of the strike of Norwegian oil workers and the activation of American shale producers contribute to lower prices. Norwegian oil companies have struck a wage deal with trade unions that avoided a 25% decline in oil and gas production in the country. According to Baker Hughes, the number of US active oil rigs continues to rise for the fourth week in a row, recently rising to 193. The revitalization of the US oil industry, along with the recent increase in oil production quotas under the OPEC+ Agreement, creates a serious likelihood of oversaturation of the market with “black gold”.
At the end of last week, EUR was supported by positive data from the Chinese economy. The index of business activity in the Chinese services sector for September rose from 54.0 to 54.8 points. However, today EUR is under pressure due to the worsening coronavirus situation and the introduction of new quarantine restrictions. For example, the Spanish authorities declared a state of emergency in Madrid and prohibited residents of several areas from leaving them except for important cases, such as travelling to work, school, or visiting a doctor. EUR is weakening against its main competitors – GBP, JPY, and USD.
GBP is weakening against JPY and USD but is strengthening against EUR. Today, representatives of the Bank of England asked financial institutions for information about their readiness for the possibility of zero or negative interest rates, which indicates the possibility of introducing new mitigating measures soon. However, it is unlikely to happen at the November meeting of the regulator since the deadline for the banks’ response consolidates later than the next decision of the Bank of England on monetary policy. Also today, Prime Minister Boris Johnson is to announce the introduction of a three-step system for isolating foci of coronavirus in the country. In areas of greatest risk, strict restrictions will apply, which will entail the closure of pubs, restaurants, and gyms. These measures are expected to be taken against Liverpool, Manchester, and other cities in northern England.
JPY is strengthening against its main competitors – USD, GBP, and EUR. JPY is supported by positive August data on machinery orders. It increased by 0.2% MoM instead of the expected decrease of 1.0%. The volume of orders decreased by 15.2% YoY, which is less than the expected 15.6%. Today, the head of the Bank of Japan, Haruhiko Kuroda, confirmed that the regulator still has instruments to support the economy to combat the consequences of the pandemic. He said that next year, consumer inflation would be positive, and in the coming years would gradually rise.
Due to a lack of significant economic releases, the movement of AUD is technical in nature. In investor sentiment, fears of an imminent decrease in the RBA interest rate again prevailed. At the last meeting of the regulator, its head Philip Lowe noted that officials consider solving the problem of high unemployment as an important national priority and continue to search for measures to support employment. After that, many experts came to the confidence that a new rate cut would take place at the November meeting of the RBA. AUD is weakening against its main competitors: GBP, EUR, JPY, and USD.