Stocks and Gold Tumble on Fear of Return to Lockdown, Dollar and Yen Jump

Market overviews

Risk aversion builds up momentum in European session and carries forward to the US, with DOW opening down more than -400 pts. New Zealand and Australian Dollars are trading broadly lower, while Sterling is also among the weakest on fear of return to coronavirus lockdown. On the other hand, the safe-have triple of Dollar, Yen and Swiss Franc are currently the strongest, with Yen having an upper hand. Gold and oil prices are also notably lower.

Technically, considering the downside momentum of today’s decline, Gold might finally be ready to break out of triangle consolidation pattern. Firm break of 1906.33 will extend the corrective pattern from 2075.18 with another leg to 1862.55 support and possibly below. USD/CAD’s break of 1.3259 resistance suggests resumption of rebound from 1.2994. Dollar traders should particularly watch for a break of 1.1737 support in EUR/USD and 1.2762 support GBP/USD to confirm the underlying strength of Dollar.

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Yen crosses are also showing downside acceleration for the moment. EUR/JPY is eyeing 122.23 fibonacci support and firm break there will raise the chance of reversing the whole rise form 114.42 to 127.07. AUD/JPY is now pressing 75.55 key near term support. Sustained break would open up deeper correction to 38.2% retracement of 59.89 to 78.46 at 71.36.

In Europe, currently, FTSE is down -2.99%. DAX is down -3.23%. CAC is down -2.97%. German 10-year yield is down -0.0386 at -0.520. Earlier in Asia, Hong Kong HSI dropped -2.06%. China Shanghai SSE dropped -0.63%. Singapore Strait Times dropped -0.48%. Japan was on holiday.

ECB Lagarde: Uncertainty requires careful assessment of information including exchange rate

ECB President Christine Lagarde said in a speech the central bank’s pandemic response measures has stabilized the markets, protected the supply of credit and support the recovery. That should in turn support the return of inflation towards target.

But at the same time, “the uncertainty of the current environment requires a very careful assessment of the incoming information, including developments in the exchange rate, with regard to its implications for the medium-term inflation outlook.. ECB stands ready to adjust all of its instruments as appropriate.

Bundesbank: German economy gradually recovering from pandemic slump

According to the Bundesbank’s monthly report, German economy is “gradually recovery from the severe slump as a result of the coronavirus pandemic”. After the massive decline in GDP in springs experts expect a “strong countermovement” in Q3. But both industry and service sector would fall well below the pre-crisis level in the summer.

Industrial productions continued its recovery at a slower pace in July Bundesbank assumes that “recovery will continue in the further course of the year, albeit at a slower pace”. Also, expectations regarding export are “still cautious”.

It also noted that unemployment stood steady at 6.4% for the three month in a row. “The recovery tendencies in employment and unemployment could continue”

Sterling down as UK at a critical juncture on returning to lockdown

Sterling tumbles broadly today on concern that UK is returning to coronavirus lockdown. Chris Whitty, the government’s chief medical officer, is expected to warn at a briefing, “the trend in the UK is heading in the wrong direction and we are at a critical point in the pandemic… We are looking at the data to see how to manage the spread of the virus ahead of a very challenging winter period”

Separately, Transport Secretary Grant Shapps also said UK was at a critical juncture, but any lockdown should be balanced. “We’re certainly at a very critical moment this morning,” Shapps said. “It is clear that we are just a few weeks behind what we’re seeing elsewhere in Europe.” “It is very important that we do everything we can to sort of bear down on this,” he added. “We’ll hear from others including the prime minister on the proposed next steps.”

UK manufacturers see no evidence of V sharp recovery

According to the Make UK/BDO Manufacturing Outlook Q3 survey, balance on investment intentions fell to -32% from -26% in the last quarter. Output and orders improved but were still way below historic averages. There were significant cuts to investment while employment prospects weakened. Forward looking indicators suggest conditions will improve albeit slowly. Overall, there was “no evidence of V shape recover”.

Also, Make UK is now forecasting manufacturing output to fall by -10.9% this year. 2021 recovery was downgraded by 6.2% to 5.1%. GDP is forecast to fall by -8.5% this year and recover by 10.1% in 2021.

USD/CAD Mid-Day Outlook

Daily Pivots: (S1) 1.3157; (P) 1.3183; (R1) 1.3229; More….

USD/CAD’s break of 1.3259 resistance suggests resumption of the rebound from 1.2994. Intraday bias is back on the upside for 38.2% retracement of 1.4667 to 1.2994 at 1.3633. At this point, we’re viewing the rebound as a corrective move. Hence, we’d look for topping sign around there. Meanwhile, on the downside, break of 1.3137 minor support is needed to indicate completion of the rebound. Otherwise, further rise will remain in favor in case of retreat.

In the bigger picture, fall from 1.4667 is seen as the third leg of the corrective pattern from 1.4689 (2016 high). Sustained break of 61.8% retracement of 1.2061 to 1.4667 at 1.3056 will target a test on 1.2061 (2017 low). But we’d expect loss of downside momentum as it approaches this key support. On the upside, though, break of 1.3715 resistance is needed to confirm completion of the fall. Otherwise, outlook will stay bearish.

Economic Indicators Update

GMT Ccy Events Actual Forecast Previous Revised
EUR German Buba Monthly Report
23:01 GBP Rightmove House Price Index M/M Sep 0.20% -0.20%
12:30 CAD New Housing Price Index M/M Aug 0.50% 0.10% 0.40%