Overview

The stalemate in U.S. stimulus talks continued as both sides remain entrenched in their views even as the effects of the pandemic rage on. U.S.-China trade tensions have not abated and appear to be escalating. Bond yields surged in response to the Federal Open Market Committee (FOMC) minutes, which gave the beleaguered U.S. dollar (USD) a brief respite and precipitated another bout of profit-taking in interest rate-sensitive sectors like gold. Yet, through all this, the S&P 500 powered its way to new all-time highs, and the Nasdaq continued its record-setting ways.

Key Takeaways

  • The S&P 500 made new all-time highs, and Apple became the first publicly traded U.S. company to have a $2 trillion market capitalization.
  • Gold's correction continued, spurred by threats of rising yields.
  • The Japanese yen (JPY) was the week's best performing currency, while the euro (EUR) was the worst.

Key Economic Events (last week)

  • (Australia) RBA Meeting – Minutes showed that the Reserve Bank of Australia (RBA) saw no need to change monetary policy, as it was having the desired effect. The members expressed concern over the re-imposition of restrictions in the southern state of Victoria, as it would affect third quarter GDP, and felt that further monetary and fiscal support would be needed to combat the effects of the pandemic.
  • (U.S.) FOMC Meeting – Minutes revealed that the FOMC, while cognizant of the need for aggressive measures to support the economy, was not overly forthcoming about "providing greater clarity regarding the likely path of the target range for the federal funds rate." This, coupled with the lack of enthusiasm for the yield curve control (YCC) policy option and a more somber view of future growth prospects, weighed on market sentiment, leading to a bout of profit-taking in some markets.
  • (U.S.) Manufacturing – The Philly Fed Manufacturing Index, an August survey of manufacturers in the Philadelphia Federal Reserve district, which covers eastern Pennsylvania, southern New jersey, and Delaware, posted a reading of 17.2. While this is still positive, it was lower than market expectations of 21 and July's reading of 24.1. Additionally, internal metrics appear to confirm the growing notion that the economic recovery is stalling.
  • (U.S.) Unemployment Claims (weekly) – U.S. jobless claims rose by 1.106 million, which was higher than forecasts of 930,000. After last week's dip below the 1 million mark, this release is a reminder that job recovery will be a slow and drawn-out process. There are still 28 million-plus Americans claiming weekly unemployment insurance benefits.
  • (France) Flash PMI – The services component of the purchasing managers index (PMI) survey came in at 51.9, much lower than forecasts of 56.3, while the manufacturing component also failed to live up to expectations, posting a reading of 49 vs. predictions of 53. Notably, this metric dipped below the 50 threshold, which delineates industry expansion and contraction.
  • (Germany) Flash PMI – The manufacturing component posted a 53, beating expectations of 52.2, but the services component came in at 50.8 vs. forecasts of 55.3. 
  • (U.K.) Flash PMI – Both manufacturing and services components beat consensus forecasts of 54 and 57 by posting readings of 55.3 and 60.1, respectively.
  • (Canada) Retail Sales Retail sales increased by 23.7% but fell short of market expectations of 24.7%, while the core figure came in at 15.7%, slightly higher than the 15% consensus. There was an upward revision to the prior month's number as the nation moved ahead with its reopening agenda.
  • (U.S.) Flash PMI – Both services and manufacturing components exceeded expectations of 50.9 and 51.9 by posting readings of 54.8 and 53.6, respectively.

Global Markets Performance

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

Commentary

Forex

Best Performer Worst Performer
CADCHF EURJPY

The Japanese yen (JPY) was the best performing major last week, followed by the Canadian dollar (CAD), as these were the only two that ended the week on a net positive note. The former might have benefited from a general theme of risk aversion, while the latter likely appreciated from stabilizing oil prices and the perception that Canada is marginally ahead of the curve in coping with the pandemic. The rest of the majors ended the week on a net negative basis, with the euro (EUR) being the worst performer. It was followed by the Swiss franc (CHF), Australian dollar (AUD), New Zealand dollar (NZD), British pound (GBP), and the U.S. dollar (USD).

Much has been made of the euro's surge over the past few weeks, aided greatly by the European Union (EU) deal on the recovery fund to combat COVID-19, and many a market pundit has opined that the euro had gone too far too fast, thus making it ripe for a pullback. Factor in the latest Eurozone PMIs, which portend a slowdown in the recovery, and the weekly Commitments of Traders (COT) report (published by the CFTC), which shows speculative long positioning in the common currency at record levels, and the stage would appear to be set for the euro's anticipated correction.

Global Indices

Best Performer Worst performer
Nasdaq 100 Russell 2000

The technology-laden Nasdaq 100 was the top performing U.S. index, while the small-cap Russell 2000 was the worst, but the most notable event of the past week was the S&P 500 hitting record highs. The previous intra-week high of 3,393.52, recorded on Feb. 19, 2020, was eclipsed on Aug. 18, 2020 – a span of 126 trading days – making it the fastest recovery from a bear market ever. Furthermore, the index closed the week at 3,397 to confirm the break higher. According to Barron's, the previous record for a recovery was the "310 trading days from Feb. 9, 1966, to May 4, 1967."

Chart of S&P 500
TradingView.com

That said, analysts were quick to caution against getting too optimistic, as "market breadth" was sub-optimal and therefore might not be sustainable. A few of the usual suspects, large-cap stocks like NVIDIA Corporation (NVDA), Apple Inc. (AAPL), Adobe Inc. (ADBE), Alphabet Inc. (GOOGL), and Amazon.com, Inc. (AMZN), with outsized performances fueled by their capabilities to adapt to pandemic conditions, provided the impetus for this move higher. Of note, Apple became the first U.S. publicly traded company with a $2 trillion market capitalization.

Oil, Yields, and Gold

Crude oil (WTI) ended the week down 0.62% despite a fourth consecutive weekly drop in U.S. crude inventories. In normal times, the threat of two potential hurricanes, Laura and Marco, bearing down on the U.S. Gulf Coast would have sent oil prices soaring. However, we are in a period unlike any other in recent memory in that COVID-19 has sent global demand cratering to the point where stored oil supplies are at record levels and are more than sufficient to withstand the expected disruption.

U.S. 10-year and German bund yields ended the week lower, with the latter completely offsetting last week's rise. The T-note's yield, on the other hand, is higher than where it was at two weeks ago, likely due to the unexpected opacity in FOMC minutes.

Gold ended the week 0.23% lower but is down 4.23% over the past two weeks. The rise in yields appears to have injected a modicum of risk for interest rate-sensitive sectors and may have catalyzed the precious metal's correction.

Key Economic Events (next week)

Date Time (EST) Event
August 23 6:45 PM (New Zealand) Retail Sales
August 25 10:00 AM (U.S.) Conference Board Consumer Confidence
August 26 8:30 AM (U.S.) Durable Goods Orders
  9:30 PM (Australia) Private Capital Expenditure (quarterly)
August 27 8:30 AM (U.S.) Preliminary GDP (quarterly)
    (U.S.) Unemployment Claims (weekly)
  9:10 AM (U.S.) Fed Chair Powell Speech
August 28 8:30 AM (Canada) GDP (monthly)
    (U.S.) Core PCE Price Index
    (U.S.) Personal Spending
  9:45 AM (U.S.) Chicago PMI

Chart(s) of Interest – EURUSD

Chart of EURUSD
EUR/USD (weekly).

If the aforementioned EUR/USD correction is truly underway, then moderate support at 1.1695 could be its initial destination. This level has twice rebuffed euro sellers and should prove to be quite formidable again. A clear breach of this could see a quick move down to prior resistance, now turned support levels, at 1.1569 and 1.1495. Conversely, a successful break of the resistance level at 1.1966 (last week's high) would be needed for the common currency to turn its attention to the psychologically important 1.20 level and beyond.

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.