September 8, 2020

US Futures Trade Higher

US Futures Trade Higher

U.S. futures are trading higher as traders return from a long weekend. Investors are shrugging off their concerns about overstretched valuations, and they are more optimistic about the improving Covid-19 situation over in the U.S.

Vaccine Optimism

There is a lot of optimism about a potential coronavirus vaccine. That’s why we saw a decent rally in the hospitality sector last week, while the tech sector came under selling pressure. The optimism is mainly because Trump has said that a coronavirus vaccine could be here as soon as October.

Trump believes that “the vaccine will be very safe and very effective”. This is unchartered territory, and no one can say that with any confidence. In the history of vaccinations, we have never had a vaccine made this quickly, so being confident about the vaccine’s effectiveness may be a fool’s errand. But Trump believes that it will be effective, and market participants are buying this, for now. 

Trump Vows Punishment 

Traders are also ignoring the fresh rise in the geopolitical tensions between the U.S. and China. Donald Trump has vowed to punish any American company that creates jobs overseas. Trump administration is also looking to ban cotton products from China, and this move is likely to impact the world’s largest clothing brands. The Forex market is showing some concerns around this fresh tension between the two superpowers, and that’s why we are seeing the Chinese Yuan sold off against the dollar. 

Sterling Meltdown Continues

Speaking of the Forex market, there is no other currency that is getting more attention than the Sterling. Boris Johnson is playing with fire, and he is risking the U.K.’s future. 

The U.K. is inching closer to a no-deal Brexit. That’s because no constructive conversation is taking place on the Brexit front. The country’s economy is on track to experience one of the largest contractions, -9.87%, and it may take a few years for us to see any recovery. 

The best possible solution to soften Brexit’s blow is to have more constructive negotiations, rather than the bullying tactic. The E.U. has shown the U.K. several times that it can’t have things both ways. Leaving the E.U. has a cost, and the U.K. must be prepared to pay that cost. The issue now is to have a more constructive Brexit conversation, and hopefully help the country’s economy recover. 

Misleading Optimism 

The economic data in the U.K. is still immensely fragile, and it is much easier to get lost in some of the positive economic readings. The fact is that the economic conditions in the U.K. are likely to get worse for two reasons.

Firstly, Brexit. Even if we have a deal, it is still going to leave some serious scars on the U.K.’s economy, which will take some time to heal. In addition to this, the government is very much determined to end the furlough scheme at any cost. This means a much higher level of unemployment, and this increase in the unemployment rate is likely to influence the consumer sentiment and their spending adversely. 

Japanese GDP 

Japanese Yen is also under the spotlight today. The Japanese economy reported its final GDP q/q data today. It came in at -7.9% against the forecast of -8.1%, while the previous reading was for -7.8%. 

Oil Continues Its Slide 

In the commodity market, oil prices are continuing their slide for another day. Saudi Arabia lowered its oil price for Asian buyers this week, and investors are taking this as a sign of weak demand. Crude oil prices have dropped below the critical support of $40, and it seems like there may be more room left for this downward move to continue its journey. The near term support for the WTI is near the $37, and tomorrow’s crude inventory data remains an important event. 

If the crude inventory data confirms that there is another drawdown, we may see the oil prices recovering some of their losses. However, if the data fails to impress the markets, the rout in the oil prices could worsen. 

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