Risky assets went higher in the last week of August with the MSCI World recording its second gain in a row, up 0.6% for the week closing at 2175.50. The USD trade-weighted index, the DXY, closed the week more or less flat after two weeks of losses and US stocks continued on the bid – S&P500 closed in a new weekly record at 2,901.52, up 0.9% for the week. The technology-dominated Nasdaq 100 is closing in on a 20% gain for the year. In Europe, the Euro was under pressure following renewed concerns on Italy with GE-IT 10yr yield spreads continuing to increase. An Italian €7bn government bond auction was well covered and did not give any cause for concerns. Speculation of an Italian rating downgrade keeps uncertainty related to the country’s debt markets, which keeps yields elevated. Gold failed to keep the positive momentum from last week and dropped back below $1,200/oz and oil (light crude) took home gains for the second week in a row with $70/barrel seeming to be the handle for further gains.
On the macro front, the US and Mexico reached a trade agreement on Monday, which triggered global optimism with auto makers in particular recording gains. The US-Mexico deal requires 75% of a car’s value to be manufactured in North America, up from Nafta’s current 62.5% and would also require 40-45% of the car to be made by workers earning at least $16 per hour. The positive sentiment continued on Tuesday, as the US Consumer Confidence came out at highest levels since November 2000. From the US, the 2nd estimate for the Q2 GDP came out higher than expected as well at 4.2% (expectations at 4.0%) without showing significant signs of increased inflation as the Core PCE Prices came out in line with expectations at 2.0%. US President Trump did not manage to proceed with a trade deal with Canada last week, but the negotiations are still ongoing. However, Trump voiced that potentially an additional tariff could be put on Chinese imports in the region of around $200bn, which could cause additional pain for emerging markets.
This week, markets will start off on a light note with the US markets closed for Labor Day. However, the Asian session showed a drop in the Chinese August Caixin PMI to 50.6 from 50.8 in July, hence closing in on a contraction in the manufacturing sector (indicated with a figure below 50). This led to Asian shares closing in negative and caused a negative opening of European shares. The German DAX is down 0.2% at the time writing and is on a technical level flirting with the 100-day SMA.
Although the trade war and ongoing concern with emerging markets (Argentina and Turkey) are likely to be the main drivers of the general sentiment, we have quite an interesting macro calendar for the week:
Tuesday: AU RBA Cash target rate, US Construction Spending and ISM Manufacturing
Wednesday: AU Real GDP, EZ PMI Markit PMIs and Retail Sales, US Trade Balance, CA BOC Rate Decision.
Thursday: CH GDP, GE Industrial Orders, SE Riksbank Rates, US ADP, US Factory Orders and ISM Non-Manufacturing.
Friday: GE Industrial Production, EZ GDP, US Job Report, CA Unemployment and Ivey PMI
FX Majors Technicals:
EURUSD: Failed sustain momentum and break the 38.2% Fibo retracement in the major wave from Jan 2017 lows – 2018 highs at 1.1707 last week as well as trend weekly resistance from May 2018. Closed back below the 100-day SMA on Friday. Short-term support at 1.1565 before 1.1515.
GBPUSD: Found offers at the 50-day SMA, currently testing short-term trend support, where a close below would open up for a re-test of the 1.28-figure. EURGBP key resistance at 0.91.
USDJPY: Although we saw an outside bearish day on Thursday, price action has seen bids at the daily Ichimoku-cloud base at 110.63 with next support at 100-day SMA at 110.36. The pair has recovered somewhat testing 50-day SMA to the upside at 111.17. A close above would open up for a test of cloud resistance at 111.56.
AUDUSD: Has been on the offer with lower lows throughout 2018. This morning the pair has found bids at the 0.72-figure, just shy of key support at the 2016 Q4 lows around 0.7150. A continuation of the bear trend would open up for a re-test of the 2016 lows at 0.6824.
USDCHF: With recent risk-aversion present, the CHF has found renewed bids with USDCHF testing sub-0.97 after being at parity with the US Dollar in July. The pair found bids on Friday at 0.9650 and the daily candle does show a hammer, which could indicate that we have seen the end of the bearish action for now.