Global Markets Review

Vaccine hopes spur global markets; euro awaits EU meeting


FX & Index Performance


Key Economic Events (last week)

  • BOJ Monetary Policy - The Bank of Japan (BOJ) voted 8-1 to keep interest rates at current levels while cautioning that economic risks were skewed to the downside.
  • BOC Monetary Policy - The Bank of Canada (BOC) left interest rates unchanged and reiterated its pledge to support the economy as long as needed.
  • New Zealand CPI (Q) - CPI (2Q) fell 0.5% as the COVID-19 induced lock-down had the predictable effect of subduing inflation and raising the odds that the central bank (RBNZ) will likely resort to further stimulus.
  • Australia Employment - The headline figure came in at 210k, which far exceeded market expectations of 106k, while the unemployment rate registered a reading of 7.4%, also exceeding market consensus of 7.2%. 
  • China GDP - China's economy grew at a rate of 3.2% on a year-over-year basis and reversed course, posting an 11.5% quarter-over-quarter growth rate.
  • ECB Monetary Policy - As expected, the European Central Bank (ECB) left interest rates unchanged while promising to continue the Pandemic Emergency Purchase Program (PEPP) until at least June 2021 or longer if needed.
  • US Unemployment claims - Weekly jobless claims rose by 1.3 million, marking the 17th straight week above 1 million.
  • US Retail Sales - Retail sales came in at 7.5%, easily surpassing forecasts of 5% as the U.S. consumer remains undaunted, buoyed no doubt by the stimulus measures enacted by Congress.

The euro (EUR) was the best performing major currency for the week ending July 17, 2020. The common currency appears to be benefiting from market expectations that European Union (EU) leaders will reach a deal on the proposed 750 billion euro ($858.5 billion) "recovery fund" when they meet this weekend in Brussels. The British pound (GBP) was the worst performer as post-reopening economic data underwhelmed. The Australian dollar (AUD) was the second best performing major, aided by the scope of further stimulus packages unveiled by the government, which included promises of significant income support.

The Swiss franc (CHF) ended the week marginally higher, but what was more interesting was the apparent lack of attention that currency markets paid to the comments by Swiss National Bank (SNB) Chair Thomas Jordan. For those wondering, this is that same gentleman who, on Jan. 15, 2015, suddenly removed the EURCHF peg, which roiled the foreign exchange markets, especially the highly leveraged retail FX market. To paraphrase, he has made it clear that he considers interventions to be the most effective arrow in the central bank's quiver to curb CHF strength (make of that what you will).

Global Indices

U.S. earnings season is at hand, and Wall Street is bracing for the worst. The consensus for second quarter estimates calls for a 12% drop in revenue, while earnings are projected to decline by 44%. The expectations for smaller companies is far worse. Russell 2000 companies are expected to post revenue declines of about 20%, and earnings are forecast to have plunged about 90%, making this reporting season worse than any during the Great Recession.

This is hardly surprising, as smaller capitalized firms will not have the financial and operating resources to retool on the fly in the face of a global pandemic (COVID-19). Analysts, though, are optimistic that revenue and earnings for the third and fourth quarters will rebound to levels that are more in line with what would be the norm for a garden variety recession. In a manner of speaking, the corporate world appears to be getting a mulligan for the second quarter.

Additionally, there was encouraging news in the fight against this global pandemic. Moderna, Inc. (MRNA) and AstraZeneca PLC (AZN), in conjunction with Oxford University researchers, announced that their respective vaccines were showing promise. Market sentiment, which was gloomy to begin the trading week, sharply reversed course, providing added impetus for global stock markets to continue their recent appreciation.

The Russell 2000, comprised of the 2000 smallest capitalized U.S. companies in the Russell 3000 index, was the best performing U.S. index, followed by the Dow Jones Industrial Average (DJIA) and the S&P 500. The technology-heavy NASDAQ ended the week lower in what was likely a bit of profit taking after its recent heady gains. It could also augur the rotation out of growth stocks with high valuations into value stocks with more reasonable valuations. The S&P 500 has almost erased its year-to-date losses, while the Dow and Russell are still under water.

Chinese stocks were the worst performers, as geopolitical concerns, especially rising tensions with the United States, weighed on investors. Indian stocks (Nifty 50) surged on Friday as investors anticipated more stimulus measures to bolster the economy even as COVID-19 infections rise in the world's second most populated nation.

Oil, Yields, and Gold

Crude oil (WTI) ended the week slightly higher even though OPEC announced that, beginning in August, it would start ramping up production, a possible indication of nascent demand. U.S. and German 10-year bond yields were lower as inflation readings continue to be well below targets and expectations of further easing measures abound. Gold was range bound but did end the week close to its recent highs.

Key Economic Events (next week)

Chart(s) of Interest

The euro ended the week at 1.1425, its highest close since January 2019, as it breached the descending trendline (connecting the February 2018 to March 2020 highs) and appears poised to make another run at March 2020 high of 1.1495. The catalyst will be the EU meeting this weekend. A positive outcome could see the common currency break through this resistance level and bring moderate resistance at 1.1569 into focus. A negative outcome could see a retracement back to the 1.1350/80 support zone.

Pivot Points and Fibonacci Retracement Levels

The pivot point is calculated from the previous trading periods' price action and can be used to determine the short-term trend. If the instrument on the following period trades above the pivot point, it is thought to be exhibiting bullish sentiment, whereas trading below the pivot point is seen as bearish. The Fibonacci retracement is the potential reversal of the instrument's original move in price.

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