Market Overview

13 August 2020

Inflation Differences and Tariffs Disputes Amend Stocks and Currencies’ Paths

The macroeconomic calendar is almost empty today, except for the initial and continuing jobless claims data from the United States. Although if there is a decrease in these indicators, this may be more than expected, and these turn of events could theoretically speed up the outflow of the capital from safe-haven U.S. Dollar bonds to a small extent, as it may give the markets more confidence about the positive vector of economic recovery. With the Federal Reserve (Fed) keeping its interest rates at almost zero levels, the Treasury's real yields are still considered to be a deadbeat, and it is not seen to be a source of inspiration for the U.S. debt holders. 

“Expect this macro-policy theme to play a major role in FX market pricing ahead of a possible Fed adoption of an average inflation target in September. This theme is a broad dollar negative,” said Chris Turner at Dutch origin ING Group, in a research note to clients. 

As for the current U.S. inflation data, Jefferies Group, which is a New-York head-quartered multinational investment bank and financial services company, just commented: "The 0.6% month-on-month increase in July core CPI [Consumer Price Index] was jaw dropping. It was the largest sequential jump since January 1991. While this momentum in pricing is unlikely to be sustained, the strength was broad-based and cannot be ignored". But keeping a cool head, it seems too early to talk about high inflation expectations, as the annual CPI which is at 1.6% is certainly higher than the June's figure of 1.1%, but still significantly lower than 2.3-2.4% levels during the pre-crisis months. Today's European CPI data from Germany showed figures of -0.5% month-to-month and -0.1% on the annual basis, not to mention the Spanish monthly CPI which was shown to be at -0.9%. These numbers do not likely confirm the first signs from American of a possible higher, global inflation pattern. 

The combination of this data, however, may have helped the single European currency to rise slightly compared to its U.S. Dollar rival, so that the EUR/USD pair managed to climb above the 1.18 level again, as the difference in inflation does not favour the future purchasing power of the Greenback. At the same time, muted inflation in the Old World may indicate a delay in the consumer demand prospect, which in turn may suppress corporate earnings. Therefore, European stocks interrupted a four-day upward course, at least in the first half of the trading session. 

Another negative factor is probably the decision of the U.S. White House to leave tariffs on Airbus and a group of other European goods unchanged. The Scotch Whisky Association commented on a decision by the United States to maintain a 25% tariff on its goods as deeply disappointing and it urged the U.K. government to do more to protect the industry. So, the major FTSE 100 stock index in London led declines among major European exchanges, as several blue chip companies in the U.K. are trading now without entitlement to a dividend pay-out. But even the FTSE 100 index only dropped within one % today, so the mid-term trends for the equity markets keep a positive view both on the European continent and on the British Isles. 

As a positive sign, the French unemployment rate fell to 7.1% in the current reading for Q2 2020, from 7.8% during the previous quarter, and especially against the strange jump to 8.3% expected by the expert polls by Bloomberg and Investing.com. This may confirm the paradox tendency when the most important economic indicators surprisingly reach much better levels than the forecasts, on both sides of the Atlantic Ocean. In general, both the currency and stock markets are moving along their own traffic-bound roads. Not counting the particulars or short-living corrections, the market sentiment inertia is seen to push the stocks to look more to the skies than to feel the ground. 

The trading activity is restrained for now, and may remain so until the very end of the week, as many investors are looking forward to the U.S.-China face-off on trade issues which are planned to take place this weekend and the consensus decision on the stimulus package in U.S. Congress. As for the recent updates on the last topic, U.S. President Donald Trump accused Democrats yesterday of not wanting to negotiate. The Federal Reserve Bank of Boston’s President Eric Rosengren said on Wednesday that he strongly supports taking additional fiscal action to help businesses and households survive the crisis. But, added more spending should be combined with more robust efforts to contain the virus. Meanwhile, Republican and Democratic wings continue to blame each other as dun is in the mire for the second week.

 

Disclaimer:

Analysis and opinions provided herein are intended solely for informational and educational purposes and don't represent a recommendation or investment advice by TeleTrade.

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