WEEKLY MARKET SNAPSHOT 14/12 – 18/12 | EUR/GBP reaches high not seen since September as Brexit talks crash onto the rocks
There are times if you trade forex, indices and commodities when the macroeconomic issues overshadow the events listed on your economic calendar. The current situation should serve as a prompt that your fundamental analysis skills and knowledge must extend beyond the data, decisions and events you see on the daily calendar.
Two predominant issues currently dominate our trading landscape, the black swan pandemic and Brexit. As you know, the very nature of black swan events ensures you don’t see them coming. Think back to this time last year, the phrase “Covid 19” was not in the international lexicon. Now, we live our lives in the shadow of the virus.
The virus has had the most peculiar effect on markets. The equity market collapse in March was entirely predictable, oil falling to a negative value because no one could take ownership and storage likewise. Safe havens like gold have also risen in both cost and investors’ perception of value. But the recovery in both equity markets and oil has been stunning.
The massive fiscal and monetary stimulus the USA government and Federal Reserve engaged in ensured all main equity markets in the US printed record highs, despite the extra 15 million unemployed and 25 million new claimants. Tesla has risen by close on 700%. Despite delivering a fraction of the cars Toyota do they’re worth over one hundred times more.
Airbnb got valued at approximately $18b before the pandemic. Despite the pandemic crushing travel demand and airlines, the firm floated on Thursday December 10 and was suddenly worth close on $90b. Its IPO price immediately doubled on entry to the market.
There is one benefit of such stellar rises in the likes of Tesla and Airbnb; debt is no longer an issue for either firm. However, the stunning elevations are an indication of how juiced the markets are and how analysis is in many ways redundant right now, more than ever you need to “trade what you see”.
The US dollar has slumped versus its main peers because of the stimuli. The dollar index (DXY) is down -6.59% year-to-date, while EUR/USD is up 8.38% in 2020. You must scour the charts to find a time when USD was under such pressure.
Early 2018 after Trump had caused an unnecessary fight with China and imposed tariffs was the last time. That event and the “tariff wars” illustrates how macroeconomic events can dominate. When Trump tweeted his anger versus China, markets reacted.
If the equity markets in the US was a being, let’s say a grumpy teenager, then it sulks when it doesn’t get what it wants, if there’s no sugar rush in the form of stimuli then the being sulks and throws a tantrum. Give it stimulation, and it’s suddenly happy. Sadly, right now, the analysis of the equity markets’ direction is that basic. Once the Senate approve the $900b+ Pandemic Relief Bill US equity markets will probably rally, just in time to ride the Santa Rally.
Similarly, if we’re looking to predict the direction of USD over the coming week, it hinges on the stimulus decision: more stimulus = a fall in the value of USD. How much it falls depends on the amount the Senate approves.
Brexit has also been the leading economic news this past week. The UK has finally reached the end of the road. Just as UK citizens became bored with the subject and voted the Tories back into power so they could “get Brexit done”, there’s general apathy and ignorance in the UK over the issue.
The average Brit has no idea how decoupling from a 40–50-year relationship with the EU will cause intense economic and social pain; many believe the lies of “sovereignty, fish, and independence”.
By Sunday the torrid saga should be over, the (supposed) final date that both parties must agree on a solution. Interestingly, the leading news from Friday’s EU Council of Leaders forum is not Brexit, but climate change and an agreement to limit emissions. The emissions breakthrough taking centre-spot could be a clue that the EU has finally given up on the UK as an enfant terrible and is fully prepared for no-deal.
As we’ve pointed out several times recently; the UK pound hasn’t risen sharply versus the US dollar over recent months, the dollar has collapsed versus all peers. It’s fallen less versus sterling. On Friday, December 11 at 11:30 am, GBP/USD traded down -0.85% at 1.3190, it’s up 0.40% year to date.
EUR/GBP was trading at 0.9182, up 0.58% on the day and up 8.07% year-to-date. The euro has held up well versus its peers during 2020, despite the ECB engaging in rounds of stimulus and interest rates being at zero or negative for depositors and ordinary savers.
If Sunday is to be the final day for the UK to reach a compromise with the EU, then we can expect sudden movements in GBP pairs once FX markets open. Therefore, traders need to consider their positions carefully. Such situations can cause significant spikes which can compromise stops and limits. In a low liquidity but high volatility trading environment, fills and spreads can be problematic.
Calendar events to monitor during the week beginning December 13
On Tuesday we get the latest claimant count and unemployment data from the UK’s ONS. Due to the complexity and obfuscation, judging how precise these figures are is like trying to pin jelly to a wall. But the prediction is for a moderate improvement in the claimant count and headline unemployment percentage of the working population.
Japan’s balance of trade is forecast to improve when the figures get disclosed on Tuesday evening; this could impact on the value of the yen.
On Wednesday the UK’s latest inflation figure is published, Canada’s is too as is the latest retail data for the USA. Neither inflation figure is likely to move the value of GBP or CAD much. The retail statistics for the USA might illustrate the appetite of the consumer to spend.
Japan’s inflation figure gets published on Thursday, and the forecast is for a dip to -0.4%. Running a deflationary economy is not a new challenge to Japanese policymakers or lawmakers.
Friday’s data releases concern the latest GfK confidence reading for UK consumers. The reading forecast is -33. The number would support a recent survey for UK working adults, suggesting close on 68% will not have enough cash to survive on December’s wage; they’ll have to borrow until January’s pay hits their bank accounts. IHS Markit will publish a slew of PMIs during the week. These low to medium impact readings are tricky to decipher in the current pandemic paradigm. They differ wildly month to month and can no longer be relied upon as accurate leading indicators.