Market is looking for a vaccine against global problems, but so far unsuccessfully

Europe is facing a new wave of a pandemic; Trump is at war with Democrats; China is conducting QE in secrecy; OPEC is preparing for a collapse in prices. The focus is shifting to domestic and regional themes.

Let's note only the key points:

  • USA

Negotiations between Republicans and Democrats on a new stimulus package have suffered another fiasco. Democrats are demanding that mail-order funding be included in the stimulus package, something Trump is trying to prevent. Donald believes that the speaker of the lower house of Congress, Pelosi, wants to delay the counting process and become acting president during the period of anarchy. Trump's executive orders to extend fiscal stimulus will add votes to Republicans and Trump personally. The intensity of personal reproaches is growing, the discussion simply does not reach other issues.

  • Fed Minutes, Aug 19

US economic reports are coming out strong, the labour market is recovering, and retail sales in the outgoing week were much better than expected. Visually, the need for new monetary stimulus from the FRS is not visible: the situation in the economy has not changed since the July meeting. The Fed may be concerned about the negative impact of the second wave of COVID-19 and the inadequacy of the new fiscal stimulus package due to unreasonable Trump decrees, but it would be more logical to postpone the decision on the QE program and control of the US GKO yield curve until the end of the year.

In the text of the document, we are looking for the FR's guarantees on the duration of the rates preservation at current levels. The publication will not have a strong impact on the markets, but if the Fed indicates its readiness to announce new monetary stimulus at its September meeting, the dollar will fall short-term.

  • China

Last week, Trump and his officials tried to convince markets that there was no risk of terminating a Phase 1 trade agreement with China. However, on Friday evening, the media reported the cancellation of the videoconference of representatives of the parties without specifying a new date. China has asked for more time to force purchases of US products to better comply with the agreement. It is clear that Beijing is not fulfilling the terms of the trade agreement, but Trump does not need an active war at the moment. The stock market crash before the elections could be a political disaster, so Donnie has to play the role of a democratic companion.

Last month's statistics for China fell short of expectations in all respects. The Bank of China announced plans to work with the country's Ministry of Finance to facilitate the sale of sovereign bonds, but no specific steps were announced. We are waiting for comments this week.

  • Great Britain

Investors chose to ignore the gloomy economic data, although there is nothing to rejoice in: the UK economy lost a record 20.4% in Q2, significantly more than the Eurozone (12.1%) or the US (9.5%). The labour market recovery is expected to be difficult as the government's anti-layoff program ends in October.

A new EU-Britain discussion session will begin tomorrow, with Barnier and Frost scheduled to report the results on Friday. The next «shadow boxing» does not promise a real breakthrough, its task is to determine the maximum boundaries of mutual concessions. So, the most pressing topic will be the problem of fishing: Macron and Merkel will hold a bilateral meeting on August 20. It is not excluded that Macron will confirm the solution of the «fish» issue, this will allow fixing at least a small positive result on Friday. The pound is still strengthening against the background of the dollar's fall and the absence of national factors for growth. On political speculations this week, we are expecting a reaction on the pound and euro.

A little more news − briefly:

  • 24 EU countries sent a complaint to the US State Department about Trump's actions, who, in their opinion, is using excessive sanctions against Nord Stream 2. The basis of such a demarche was a statement by EU official Josep Borrell on July 17, but in fact, this is the result of the conflict between Merkel and Trump. Last week, three Republican senators reported that the German port of Mukran (the project's logistics base) would be subject to legal and economic sanctions if it continued to participate in the pipeline. The European Commission plans to discuss issues of compliance of US extraterritorial sanctions with international law this week.
  • The US gave away nearly $250 billion in payments to unemployed people who lost their jobs due to the pandemic. Now payments according to the program adopted by Congress are $600 per week, but, according to the president, the amount of assistance should be reduced, as this «morally prevents» Americans from returning to work. Moreover, for some categories of workers, this benefit exceeds the pre-lockdown wage level. Trump has signed a new «executive order» that calls for the resumption of payments to the federal governments, but only for $300 a week, and an additional $100 must be funded from the state budget. The payment program is calculated until December 6, but the funds are no longer enough: Trump is actively using the fund to fight the consequences of disasters, which is about $70 billion, but now, alas, the fund is not replenished.
  • According to the China Depository and Clearing Corporation, the volume of sovereign bonds held by «other» investors (central banks and clearing houses) rose to 1.78 trillion in July. yuan (+196.5 billion). That is, amid the record-breaking issuance of China's national debt, the NBK began to buy out confident debt from local banks, which is considered an extremely rare step for the regulator. Perhaps this fact does not mean the launch of a full-fledged QE program, and the regulator buys only «anti-virus» bonds, the proceeds of which go to projects with stable income. Fans of Asian assets are advised to carefully study any information on this topic.
  • A meeting of the OPEC + committee outside of OPEC will take place on August 19, but no calls for additional cuts in oil production are expected. OPEC has downgraded its forecast for global oil demand for 2020: world oil demand will fall more this year, and next year it will grow by 7 million barrels. According to the main benchmarks of oil, there is still a chance of updating the highs before a strong technical correction.

This week, pay attention:

  • USA − PMI of industry and services, weekly jobless claims, manufacturing index of the Federal Reserve Bank of Philadelphia, reports on the construction sector.
  • Eurozone − PMI of industry and services in the Eurozone for August, consumer price inflation for July.
  • UK − inflation report, retail sales statistics, the significant decline is expected.
  • China − we are waiting for a new date for analysts on the implementation of the «first phase» agreement until then surprises are unlikely.

The comments of the FRS officials will try to correct the expectations of market participants, but it is more likely that analysts will prefer to wait for the publication of the labour market report for August before making a final decision. The ECB minutes will be published on Thursday, no new ideas are planned.

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Author: Alexander Ward,
ForexChief Currency strategist