Overview

The euro (EUR) appreciated last week after the member states reached an agreement on the €750 billion ($881.8 billion) recovery fund to combat the effects of COVID-19. In addition, stocks fell and gold surged as U.S.-China tensions escalated.

Economic Events (last week)

  • EU summit – The EU reached an agreement on the €750 billion "recovery fund" to combat the effects of COVID-19. The main sticking point leading up to last weekend's meeting in Brussels was the division of funds between grants and low-interest loans. The hawkish "donor" countries, led by the "frugal four" (Netherlands, Denmark, Austria, and Sweden), balked at the original €500 billion in grants demand by the "recipient" countries, led by Italy, Spain, and a few other severely affected nations. The compromise was reached at €390 billion in grants and €360 billion in low-interest loans, with Italy (€209 billion) and Spain (€140 billion) being the prime beneficiaries. Oversight of how each country plans to spend its allocated funds will be conducted by a qualified majority of the 27 member states. Additionally, the "donors" will receive discounts on their financial contributions to the EU budget.
  • Canada retail sales Canada retail sales for May came in at 18.7%, while the core component posted a reading of 10.6%. Both numbers were below market expectations of 20.2% and 11.8%, respectively.
  • Australia retail sales Australia retail sales for June rose by 2.4% according to data published by ABS.
  • U.S. unemployment claims (weekly) – U.S. jobless claims rose by 1.41 million, marking the 18th straight week above 1 million. Notably, this was the first increase (week over week) since the end of March.
  • Euro-zone PMIs German manufacturing and services purchasing managers' indices (PMIs) posted better-than-expected readings of 50 and 56.7 versus forecasts of 48 and 50.4. French manufacturing PMI came in at 52, slightly below market expectations of 53.1, while the services reading at 57.8 beat market expectations of 52.3
  • U.S. PMI Manufacturing PMI posted its highest reading since January 2020 at 51.3 but could not beat the consensus forecast of 52.0. The firms surveyed indicated stability of business activity but a decline in new orders.

Global Markets Performance

Graph showing global markets performance
Global markets performance.
FX & Index Performance
Market Best             Worst
FX EUR CHF GBP AUD NZD CAD JPY USD
Index Nifty 50 S&P 500 Russell 2000 Dow 30 DAX 30 Nikkei 225 Nasdaq 100 China A50

Commentary

Forex

Best Performer Worst Performer
EURUSD USDCHF

The EUR was the best performing major currency for the second straight week. The common currency appreciated last week on expectations that European Union (EU) leaders will reach a deal on the proposed €750 billion "recovery fund." The continuation of its rise this week was based on the reality that such a deal had, indeed, been reached. Markets tend to "buy the rumor/sell the fact," but in this case, it was more of "buy the rumor/buy the fact," which leads one to speculate that there might be more appreciation in store for the EUR. At some point, the strength of the EUR might, and probably will, cause issues for exporters (Germany), but as of now, that does not appear to be a concern.

The United States dollar (USD) was the worst performing major as mounting evidence of a resurgence in COVID-19 infections brought back fears of a protracted downturn in the economy. While the fight against this pandemic will be led by the science professionals, the job of keeping the economy from imploding will fall squarely on the Federal Reserve Board (Fed). The market appears to be concluding that the extremely accommodative monetary policy, with rates at zero, adopted at the onset of this crisis will be the default policy for a much longer period than anticipated. This week's Federal Open Market Committee (FOMC) meeting and accompanying press conference are sure to garner much interest.

The Swiss franc (CHF) ended the week as the second best performer. Investors flocked to this unit given its reputation for being a "safe haven" in times of global turmoil. As mentioned last week, the apparent lack of attention paid to the July 14, 2020, comments by Swiss National Bank (SNB) Chairman Thomas Jordan was a bit perplexing. His exact comment was, "interventions in the foreign exchange market, in which we buy foreign currencies and sell Swiss francs, also play a central role in our policy mix."

Credibility is key for any central banker. The markets must believe that you will do as you say. For those wondering, this is that same gentleman who, on Jan. 15, 2015, suddenly removed the EURCHF peg, which roiled the foreign exchange (FX) markets, especially the highly leveraged retail FX market. It is hard to imagine that continued CHF appreciation is something that Swiss policy makers will gladly accept, but then again, the world is fighting a pandemic.

Chart showing the performance of the U.S. dollar vs. the Swiss franc (USDCHF)
TradingView

Global Indices

Best Performer Worst Performer
Nifty 50 China A50

U.S. earnings season is well under way, and the performance of the major indices would lend credence to the the notion that, though Wall Street is bracing for the worst reporting since the Great Recession, the corporate world appears to be getting a mulligan for the COVID-19 ravaged second quarter.

The consensus among analysts is that the global equity market rally is largely being fueled by these factors:

  1. Large-cap high-tech firms, such as Amazon.com, Inc. (AMZN) and Netflix, Inc. (NFLX) surging on an acceleration of online activities. This pandemic-induced shift in consumer spending behavior is benefiting these companies disproportionately, which in turn is having the effect of lifting other firms that have both the capitalization and operational capacity to adapt to the new global paradigm.
  2. 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. Other companies, like Pfizer Inc. (PFE) partnering with BioNTech SE (BTNX), reported results that were heartening to the point where the United States has agreed to pay them almost $2 billion to secure 100 million of their experimental COVID-19 vaccine doses, pending regulatory approval, to provide to Americans free of charge.
  3. Central banker commitment to keep interest rates as low as possible. For example, the Fed was very proactive in dropping rates to zero and has since maintained its desire to continue to do so as long as needed. This, essentially, removes volatility in Treasuries and benefits equities.
  4. Expectations that governments will continue to provide financial aid to support their respective economies. For example, the U.S. Congress is expected to unveil an additional aid package shorty, especially with certain key programs, such as unemployment insurance, set to expire at the end of July.
  5. EU reaching an agreement. This just happened, so it can't be cited as a reason for the rally to date, but it could be a factor going forward. The fact that all 27 member nations agreed to put aside differences and come together in a unifying purpose was just as important as the details of the deal itself. This expression of solidarity could go a long way in dispelling growing doubts about EU's future and boost investor appetite toward that region.

That said, most of the major global market indices ended the week lower. The catalyst was the escalation in the ongoing U.S.-China feud. Geopolitical tensions are never a good thing for global markets, but when that tension is between the two largest economies in the world, then investor apprehension is sure to be amplified. Last week's episode saw the United States order China to close down its Houston consulate, leading to China ordering the United States to shut down one of its consulates in Chengdu.

Chinese stocks were the worst performers for the second consecutive week. The China A50 is down (5.29%) for the two-week period. The technology-heavy NASDAQ ended the week as the second worst performer and was down (2.89%) over the past two weeks. This could be a byproduct of profit taking after its recent heady gains, or it could augur the rotation into value stocks with more reasonable valuations, but it could also be due to the exposure that some of the biggest names in that index have to the Chinese market.

Indian stocks (Nifty 50) ended the week as the best performers, even as the rate of COVID-19 infections rises in the country. Aside from the anticipated stimulus measures to bolster the economy and the potential vaccine optimism, the impetus might be a reallocation of foreign capital that is eager to gain a foothold in the world's largest democracy.

Oil, Yields, and Gold

Crude oil (WTI) ended the week higher even as the market awaits OPEC ramping up production in August. U.S. bond yields were lower as inflation readings continue to be well below targets amid rising expectations that monetary policy will be accommodative for longer than previously thought. German bund yields ended the week incrementally higher. Gold surged by over 5%, ending the week around the $1,900 level, aided in large part by the escalation of U.S.-China dispute and a markedly lower USD.

Economic Events (next week)

Key Economic Events (Next Week)
Event
U.S. Durable Goods
Australia CPI (q)
U.S. Pending Home Sales
U.S. Monetary Policy (FOMC)
Germany Preliminary GDP (q)
U.S. Advance GDP (q)
U.S. Unemployment Claims (w)
China Manufacturing PMI
Canada GDP
U.S. Core PCE Price Index

Chart(s) of Interest

Chart showing the performance of the euro vs. the U.S. dollar (EURUSD)
{source: Tradingview}.

The euro ended the week at 1.1654, its highest close since September 2018, as it pierced through both the 1.1495 (March 2020 high) and 1.1569 (January 2019 high) resistance levels. As anticipated, the catalyst was the positive outcome of the EU meeting this past weekend. The momentum generated appears to be strong enough for continued EUR appreciation in the coming weeks, with a test of key resistance at 1.1815 (September 2018 high) in the offing. Conversely, the surge has created an overbought state that could see a retracement back to the previous resistance, now turned support levels, at 1.1569 and 1.1495.

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.

Table showing Pivot points and Fibonacci retracements
Pivot points and Fibonacci retracements.

Disclosure: The author held no positions in the aforementioned securities at the time of publication.