Optimistic US and Germany PMI data signals growth, investors await ADP employment figures

Market Recap

Global equity market

(Source: KVB PRIME)

US stocks performed well again yesterday; the Dow Jones closed up 0.76% at 28646.45, the NASDAQ refreshed new highs at 12292.86 (a 1.5% rise) and the SP 500 rose 0.75% to 3526.65. China’s concept stocks also performed strongly.

European stocks, however, had no such luck - the DAX closed slightly higherby 0.22% at 12974.25, while the FTSE closed down by 1.7% at 5862.05.

The Chinese market has now ostensibly recovered from its fall from the middle of July. The Shanghai Stock index closed up by 0.4%, the SZSE Component Index closed up by 0.066% and the GEM index climbed back 1%.

Precious metalsstrengthened, while the semiconductor production and innovation industries recovered from previous falls.

Precious metal forward contracts

Gold prices started to boost at the opening, climbing to $1990 during the Asian sessionand hitting new highs at $1992.27 after a slight drop after the European market opened.

The story changed after US session began, though; theprice dropped back to $1963 - a $30 fall from the daily high - closing up by 0.12% at $1969.6.

Crude oil forward contracts

WTI oil rose above the $43 mark and hit daily highsof $43.3, which was followed by a quick fall in price by roughly $0.6. As of closing, the price was fixed at $42.9, representing a 0.42% rise.

The Brent oil price boosted by 2% but then went down like WTI during the US market, closing at $45.78 – down by a total of 0.42%.

Currency pairs

·        USDX up to92.3(0.152%)

·        EUR/USDdown to1.19142(-0.188%)

·        GBP/USDup to1.33765(0.075%)

·        AUD/USDdown to0.73741(-0.005%)

·        NZD/USDup to 0.67584(0.367%)

·        USD/CAD up to1.30614 (0.156%)

·        USD/JPY up to105.929(0.044%)

Global Fundamentals

United States

The ISM Manufacturing PMI for the United States increased to 56 in August from 54.2 in July, beating market forecasts of 54.5. The reading pointed to the biggest expansion in the manufacturing sector since November of 2018as August was the first full month of operations following the recommencement of supply chains.

However, the US employment rate is still lower than some economists had previously predicted.

Europe

James Slack, spokesman of British Prime Minister Boris Johnson, stated it is not proving easy to reach a trading agreement on Brexit, noting that the UK would like to focus on making progress on small and easy issues first to facilitate the wider negotiationprocess.

IHS Markit’s German Manufacturing PMI was revised lower to 52.2 in August from a preliminary prediction of 53. Nevertheless, the reading pointed to the second straight month of rising factory activity and the strongest growth rate since October 2018.

New orders continued to rebound from the lows experienced during the coronavirus lockdown and growth of production reached the strongest for two-and-a-half years, led primarily by intermediate and consumer goods, while producersof investment goods were seen to lag behind.

Australia

The Reserve Bank of Australia (RBA) kept official interest rates on hold at its September meeting this week. The cash rate currently sits at the historic low of 0.25%, where it has remained since late March.

RBA also stated that the inflation rate will be targeted at 1%-1.15% overthe next few years.

Crude oil

OPEC published its monthly Oil Market Report for August 2020. Daily production increased to 23.94 million barrels - a rise of 0.55 million barrels, lower than maximum permitted rise of 1.2 million barrels.

The executive rate of production cut off is 95% in July and 99% in August. 

Today’s major asset analysis

GBP/USD

We would choose to maintain our mid-term strategy for both the GBP and EUR intraday, despite the current short-term price recovery.

The market is still looking for progress on the trading agreement regarding Brexit. The German PMI data was optimistic, but a ‘v-shaped’ recoverystill seems a far-fetched notion.

The COVID-19 situation is leading to economic shifts as opposed to full-on recoveries, so the right recovery will be achieved slowly but surely.

For an intraday layout, the Cable has a high possibility of recovering to near 1.332. However, stringent risk control is required as our strategy is based on the top pattern. 

[GBP/USD, four-hour chart] (Source: KVB PRIME)

AUD/USD

Chasing highs on the Australian dollaris not recommended, as weanalysed yesterday. The declinehas not stopped completelyand theprice might yet fall through the weekly average.

Associated with the relatively weak USD, a preferable mid-term strategy for the Aussie would be based aroundlong positions. Over thelong term, we don’t hold a positive forecast for the AUD during Q4. 

Additionally, there might be contradictions among short, mid and long term placements on the AUD/USD pair. 

[AUD/USD, four-hour chart] (Source: KVB PRIME)

Gold

Gold prices moved back to 1965 as predicted, but the timeframe did not fit in with our estimations.

Gold is now forming a top pattern; the price is supported by both daily and weekly averages, but we still expect the price will drop due to optimistic expectationsregarding the ADP data and other US fundamentals being released tonight.

Accordingly, the gold price might fall back to 1945. As per yesterday’s analysis, though, this fall would likely not trigger anysignificant mid-term decline in the average price.

[XAU/USD, four-hour chart] (Source: KVB PRIME)

USD Index

The USDX performed strongly after the PMI was released. However, as discussed in ourlivecast, a strong PMI does not necessarily lead to a strong recovery and a short-term rebound does not automatically lead to a long-term trend.

If there is any progress on the Brexit trading agreement, the EUR and GBP - two major components of the USDX - will turn strong again, which will lead to a weak USDX.

Intraday, the ADP data and tonight’s other US fundamentals are expected to be better than before, so longing the USDX whilst targeting 92.8 is a preferred plan.

Despite this, the USDX will not be fundamentally strong until November’s election candidates begin to put plans into action rather than simply talking.

[USDX, four-hour chart] (Source: KVB PRIME)