4 September 2020
Arguably the most noteworthy headline in financial markets yesterday was the sharp retracement witnessed in US equity markets, which sold-off from all-time highs.Arguably the most noteworthy headline in financial markets yesterday was the sharp retracement witnessed in US equity markets, which sold-off from all-time highs.Despite the situation appearing to stabilise, the US continues to reel from the aggressive spread of the COVID-19 virus. A fragile recovery in the US economy has also raised concerns that the recent equity rally may be slightly excessive and not justified by fundamentals. The extent of the move lower in stocks has actually proved good news for the US dollar, which has been a broad benefactor of the risk aversion that has swept through financial markets. Today could be a pretty pivotal moment for the dollar, with this month’s nonfarm payrolls report set for release.The market is eyeing a headline job creation number around the 1.4 million mark, which would be a slight slowdown from last month’s 1.76 million jobs created, although still a very healthy level. We think that risks are slightly skewed towards a positive surprise this afternoon. Not only have the latest virus numbers eased, but we have also seen a drop in jobless claims, an increase in the ADP employment number and improvements in the employment components of ISM’s services and manufacturing indices. A strong report today could trigger a more protracted rebound in the dollar, whereas a weak reading would raise concerns over the US recovery and could send EUR/USD back above the 1.19 level, in our view.
Sterling set for worst weekly performance since mid-June
Elsewhere, sterling was on course for its worst weekly performance since mid-June this morning, as it hovered around the 1.33 level versus the broadly stronger US dollar. Concerns that the UK will not be able to secure a trade deal with the European Union before the end of the year continues to remain a risk for sterling. The EU’s chief negotiator Michel Barnier has once again fuelled these concerns this week, claiming that he was ‘worried and disappointed’ regarding discussions. We have certainly not seen any knee-jerk reaction in the UK currency just yet to the prospect of a ‘no deal’. Yet with every week that passes the reality may set in for investors, and we may see a bit of fragility in the pound as we approach year-end.This morning’s UK construction PMI was largely overlooked, with investors instead focusing all their attention on this afternoon’s US payrolls report.
