September 7, 2020

European Futures Trade With Caution

European Futures Trade With Caution

European futures are trading slightly higher, even though we had an abysmal reading for the German economy. The German July industrial output rose only 1.2% on a month/month basis, while the forecast was for 4.5%.

This is certainly a piece of important news for the European Central Bank, which will be announcing its monetary policy decision later this week. The expectations are that the bank will not move a muscle when it comes to its monetary policy, meaning the interest rate and rest of the monetary policy will remain intact. However, it is expected that the bank may drop some hints about starting to wind down its emergency support program, which was initiated to help the eurozone’s economies. 

Today is a bank holiday in the U.S. This means that the volume in the Forex and other stock markets is likely to remain on the low side. U.S. futures are trading lower, and investors are picking up the momentum where they left off last week.

Tech stocks faced a heavy sell-off last week; in fact, the Nasdaq index had the worst week since March this year. It appears traders are still not satisfied with the tech stock valuations, and they do believe that more correction is still on the cards. 

All of this is despite the fact that the U.S. NFP data that we received last week was much better than the market forecast. For instance, the forecast for the unemployment rate was 9.8% against the previous reading of 10.2%. However, the actual number came in at 8.4%. Market participants were completely shocked to see the U.S. unemployment rate falling to this level so quickly. 

In terms of the headline number, the U.S. economy created 1.37 million jobs last month, which was a lot less than the number of jobs created during July. However, traders ignored this dismal reading and paid more attention to the participation rate.

For market participants, the jobs number was good because economists weren’t expecting any improvement in the wage growth number. Although, it is important to mention that the part of the uptick that we experienced in the employment number and wage growth was primarily due to the employment of seasonal and temporary workers. 

The Reaction 

The initial reaction to the gold price was a move to the downside because there was decent progress made for all economic numbers that were released on Friday. The fact is that the move of the unemployment rate is in the right direction, and now it is in the single-digit territory. This is positive for the U.S. economy.

In terms of fixed income space, the 10-year Treasury yields soared more than 6%, but the U.S. stock closed in negative territory. 

Friday’s data wasn’t about the Fed shifting its stance on the monetary policy. It was more about fiscal help in terms of the second stimulus. The data has confirmed that we still need more help on the fiscal side; the gradual recovery for the U.S. economy could face many challenges in the absence of this support.

In very simple terms, the absence of fiscal help means more layoffs in the coming weeks and possibly higher bankruptcies.

What is Next?

The big question for investors and traders is what is next for the stock market and where do we go from here. The future path for the U.S. stock market is really dependent on two main factors, and these factors are likely to make or break the current rally.

First, it is all about the fiscal help, which is currently under discussion in Washington. This would be the second stimulus aid package, and a potential deal can come out of these talks. Investors are hoping for this deal to be at least two trillion dollars, but only time will tell what the actual deal will look like. But one thing is for certain that it is likely to bring higher volatility in the market

Secondly, it is all about the coronavirus vaccine, and the results for the third and final stage for this vaccine are due as early as this month. As previously discussed, the U.S. has already informed several states that they need to be ready for a potential vaccine by the first week of November. So traders are hoping to see a coronavirus by then.