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Research Market strategy
by Swissquote Analysts
Daily Market Brief

US fiscal talks progress. BoE decision in focus.


US fiscal talks progress. BoE decision in focus.

By Ipek Ozkardeskaya

US stocks extended gains as investors saw progress on negotiations for the US’ next fiscal stimulus package as White House made some concessions to end the deadlock, although Democrats ask for more. A deal is not reached yet, but House speaker Nancy Pelosi said Democrats are determined to seal a deal by Friday. So, the expectation that good news will soon hit the wires keeps investors on track for buying more US equities.

Elsewhere, the sentiment is mixed. Major Asian indices traded in the red on escalating US-China tensions, as US Secretary of State Mike Pampeo said he wants to see ‘untrusted Chinese apps’ being removed from the app stores, bringing the fight beyond Tiktok. Equities in Shanghai (-0.38%) and Hong Kong (-1.59%) lost, the Nikkei retreated 0.51%, while the ASX 200 (+0.31%) was led higher by mining, energy and industrial stocks.

The US dollar slipped below the 93 mark, as the US 10-year treasury yield rose to 0.54%. Strong demand in US treasuries despite the skyrocketing US sovereign debt continues keeping the US sovereign yields near their all-time low levels, certainly because there is little alternative to ‘risk-free’ US sovereign holdings with government debts rising globally.

Speaking of risk haven, gold extended its breathtaking rally above the $2050 per oz on Wednesday. There is astonishingly thin profit taking and no alarming sign of exhaustion at the current levels. Still, a downside correction will likely happen with the dust settling in Beirut and drag the price of an ounce within the $2000/1980 per oz area. If support holds at this zone, we could see consolidation and a further positive attempt in gold prices. If not, there could be a rapid unwind in short-term speculative long positions and a sharp price retrace.

Data-wise, the European July services PMI figures released yesterday were strong, even though the numbers slightly missed analyst expectations. Still, the major European indices closed in the positive territory. The FTSE outperformed its peers, as mining stocks led by gold miners pushed the commodity-heavy index above the 6110p mark. Activity in FTSE futures (-0.57%) hint at downside correction at the open, but the British blue-chip index is expected to see support from a solid rise in oil and commodity prices and to consolidate above the 6000p mark.

The boost in oil prices following the Beirut blast pushed WTI crude above its 200-day moving average of $43 pb on Wednesday, but decent offers blocked the way higher above this level. Supply side shocks tend to have a short-lived positive impact on oil prices, provided that the global oil market is already flooded with excess supply. Only an upside revision in demand expectations could carry the oil rally sustainably higher. Otherwise, investors will continue hunting top selling opportunities to push the price of a barrel near and below the $40 handle.

The EURUSD nearly, fully recovered early-week losses against a broadly softer US dollar and is preparing to attack the 1.19 offers for the second straight week. The pair’s upside potential mostly depends on the global US dollar performance. Further slide in the greenback will pave the way for an advance toward the 1.20 handle.

Cable consolidates gains above the 1.31 mark on the back of a weaker US dollar, as well. The highlight of the day is the Bank of England (BoE) policy decision. The BoE is expected to maintain its interest rates and asset purchases policy unchanged at this month’s meeting, but there is a chatter that moving toward the year-end, the bank should allow banks to borrow at negative rates, or increase the volume of funds available at the bank rate to further relax the financial conditions. Hence, the BoE doves should bring a certain downside pressure on sterling against the dollar and the euro.

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