The week ahead: Three things that don’t include the US election
While the US Presidential election is likely to dominate the news cycle in the coming weeks, there are other events that could also be market-moving. Below we choose our top three picks.
1. The FTSE 100 and the pound: the index has lagged behind the recovery in Europe and the US at the start of the week. At the same time as the FTSE 100 is struggling to keep up with its global peers, GBP/USD is testing $1.30 again. While the pound is getting a boost from the pause in the dollar’s rally, UK stocks are struggling under the weight of a resurgent pound. We believe that the future direction of the pound will hinge on the progress of trade talks between the UK government and the EU. At the start of this week the tone between the two sides has improved. Boris Johnson had talks with EU chiefs at the weekend, and both sides are discussing fisheries, which has been a major sticking point in the negotiations. We continue to believe that the two sides will hash out the bones of a trade deal in the next couple of weeks, which could be pound positive. However, a strong pound could weigh on the FTSE 100. Added to this, we could see stronger economic data have a larger impact on the pound than the FTSE 100. This was the case on Monday, when a better than expected services sector PMI for September also drove the pound’s strength. To conclude, we are looking for pound strength from any positive signs that a trade deal between the EU and the UK is forthcoming.
2. Gold and US stocks: Is the world over gold yet? After breaking above $2,000 per ounce, it fell sharply from August until the third week of September, and since then it has embarked on a recovery. However, that recovery is looking fairly tepid. Gold may try to take the $2,000 level once more, but if it is rebuffed again then we may see a steeper sell off. That’s the trouble with gold, it rallies for long periods and then sells off for long periods. The long-term gold chart is full of peaks and troughs, unlike the long-term chart of the S&P 500, which shows that, over long periods of time, stocks mostly rise. This is why we think that some unloved US stocks, in the retail and energy sectors, could drive a broader US stock market rally in the coming months. Part of this rally could be driven by investors moving out of gold, which looks expensive, and into undervalued sectors of the US stock market. Even with more economic stimulus and the Fed’s new policy to allow higher rates of inflation to go unchecked, we don’t think gold will be needed as an inflation hedge for many years yet. This could erode gold’s allure in the coming weeks and months.
3. The ECB and the euro: The second wave of Covid seems to have hit Europe’s economies harder than the US and the UK, if you look at the relative performance of their service sector PMIs for September. This makes the ECB’s relatively sanguine view of a strong euro and its fairly hawkish stance at its last meeting seem odd. The ECB President has the chance to put this right when she speaks on Tuesday at 1pm GMT. She may use this as an opportunity to prepare the market for a boost to the ECB’s bond-buying programme later this month. If that happens then we believe the euro could be in trouble vs. the USD and GBP. EUR/USD has staged a decent recovery in October after September’s declines. However, a dovish Lagarde could change that and see EUR/USD retrace its steps back towards the $1.1610 lows from the end of September. EUR/GBP has been grinding lower for most the last month, £0.90 is key support followed by £0.8860, the low from 3rd September.
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