August can be a very difficult time for markets. This month there was a default in Russia in 1998, China devalued the yuan in 2015, and BNP Paribas started a subprime lending crisis by freezing its three funds in 2007.
Much may go wrong in August and this year as the world economy fluctuates with a pandemic, a bubble of tension between the U.S. and China. U.S. elections are adding oil to the fire of uncertainty, and Turkey may repeat the lyre crisis in 2018.
However, 80% of S&P500 companies beat expectations when only 65% of European companies are in the EU, according to Refinitiv IBES. General Motors and Caterpillar presented positive surprises, but the technology sector really surprised. Amazon reported the biggest profits in the company's history, Facebook surpassed expectations on advertising sales, and Apple reported more iPhone sales than the company expected.
At the same time, we are going to go through quite an interesting week. The U.S. government has not been able to find consensus on helping people affected by the coronavirus. The Republicans continue to "fight" with the Democrats and the solutions to this confrontation are not yet visible. The last payments to the Americans on this aid were on July 31, will there be new ones and if so, when? The Americans are living in this ignorance now. This can only say that they will start saving much more, and this will slow down the growth of the US economy.
Despite all the achievements of the U.S. stock market, the decline in the country's GDP has hit the yield of treasury bonds. The economic downturn resulted in record low yields on three-, five- and twenty-year treasury bonds. The entire yield curve is close to falling below 1%.
A new cause for decline may be an increase in the US unemployment rate. US labor market data is expected this Friday and forecasts are extremely uncertain. Salaries rose 4.8 million in June, exceeding expectations of 3 million, while the forecast for July provides for an increase of 2.2 million.
Weekly applications for unemployment benefits continue to rise. The supplements to the scheme to help those affected by cuts and those who simply lost their jobs due to severe quarantine ended last Friday. The chances of an increase in the benefits seem to be slim for the time being.
The key event of the week, of course, will be the release on the US labor market. Economists believe that last month will also be successful and the US economy created almost 2 million jobs. Authorities in most of the states affected by the covid-19 bursts tightened restrictive measures only in mid-July. I wonder how this will affect the report.
Strong employment growth will definitely support the dollar. However, if the release does not meet expectations, investors will consider it as a harbinger of big problems.
We dealt with the American dollar and the euro in the previous review, it was the turn of the British pound sterling. This pair has been strengthening for eleven consecutive trading days. Such a long rally has not been observed for the last ten years. The nearest support is 1.30, but the target is 1.35, through the resistance at 1.32.
Like the ECB and the Fed at their last meetings, the Bank of England may take a waiting position to evaluate the economic recovery at its meeting on August 6. It should be remembered that the BA at its last meeting held a more "hawkish" tone than the markets expected. No significant changes in the forecasts of the British regulator are not expected, because the state of the country's economy has improved over this time.
At the same time, some are surprised by the unwillingness of the markets to put pressure on the Bank of England due to reduced interest rates. Based on signs that the recovery will be slow and the UK needs to close a trade deal with the EU before the end of Brexit transition period on December 31.
But the Bank's position may be reasonable. It may add another £70bn to its bond purchase plan after raising the bar by £100bn last month.
Therefore, given the fact that there is no consensus on Brexit with the EU yet, the Bank of England is likely to want to keep its existing stock at the interest rate, which would provide room for maneuver if necessary. The trade should be strictly based on the rhetoric of the British Central Bank.
The oil price is set to go through another test because of fears of an economic downturn due to the growing incidence of covid-19 contamination around the world and fears of oversupply as OPEC and its allies intend to curtail production decline in August.
"Speculators seem increasingly nervous about the recovery in demand as the second half of the year is much more gradual than the market expects," said Warren Patterson, head of commodity strategy at ING.
Cases of coronavirus continue to grow in the U.S. and reached almost 18 million worldwide. More and more countries have introduced new restrictions or expanded current restrictions to fight the pandemic.
Against the backdrop of slow recovery in demand for fuel due to the revival of the virus wave, investors are concerned about the oversupply, as OPEC and OPEC+ will ease restrictions on oil supplies from August.
"There are concerns that OPEC+'s production growth will be accompanied by an uneven recovery in demand for oil due to localized recessions caused by the second wave of covid-19 outbreak," said Harry Chilinguryan, Head of Commodity Research at BNP Paribas.
OPEC and OPEC+ members cut production by 9.7 mbpd since May. From August the cuts will be officially at 7.7mbpd until December of the month.