EURO / USD
The news of U.S. President Donald Trump's illness stirred up the markets, but by the end of last Friday's trading the picture had become more or less stable. Market participants judiciously chose to watch how hard or easy Trump will suffer from the disease. If the President's condition does not deteriorate in the coming days, the U.S. stock market may resume growth, recovering losses.
The U.S. labor market report for September fell short of expectations: the economy created 661,000 new jobs and average wage growth slowed by 0.2%. However, unemployment fell to 7.9%, up 8.2% from expectations. The fact that the unemployment rate had fallen more significantly was sufficient for traders who did not sell the U.S. dollar. Those who traded directly on this report may have noticed this.
What does this market reaction tell us about such a significant U.S. macrostatistics indicator? Only that most participants prefer to see more optimism in the current conditions. The coronavirus pandemic has significantly shifted its priorities. Also, we can no longer see a relatively standard correlation between the U.S. stock market and an asset such as gold. For many years, when the US stock market was growing, gold was falling in price, but this year we see a very different picture.
We're moving to Europe. On Friday, the Spanish government "quarantined" Madrid, reducing the maximum load of restaurants, gyms, stores and other public places by half. This is a serious blow to business and the economy in general, as Madrid is the economic center of the country. France in Paris also imposes similar restrictions. If the epidemiological situation in other EU countries also deteriorates, they may follow the example of Spain and France.
Given the continuing uncertainty surrounding Braxit, the level of 1,17530 may be strong enough that the euro has overwhelmed it. Of course, if Donald Trump's condition does not deteriorate.
As the world economy recovers, there is a gap between the manufacturing and services sectors, the latter being severely affected by covid-19 restrictions. After a sharp decline in the European services business index, the U.S. data for September is now expected to be released.
Services such as retail, hospitality and logistics account for two-thirds of U.S. jobs. But so far, unlike Europe, non-production activity in the U.S. continues to grow, as the Institute for Supply Management index shows.
The situation may change if additional assistance is not provided to the unemployed and small businesses, as income has already decreased. The House of Representatives finally approved a $2.2 trillion aid package, but the Senate is expected to reject the plan. According to market expectations, the aid package will not be approved until after the presidential election on November 3.
Both ECB and Fed politicians will speak during the week, and the minutes from the last Fed meeting will be published on Wednesday. But the focus should be on business activity and how the U.S. president will tolerate the disease. Those are the main drivers this week, not including force majeure.
The European Union has launched legal proceedings against Britain over its plans to pass a law that contradicts the part of the legally binding agreement on Braxit signed by the parties late last year.
Brussels gave London a deadline until September 30 to withdraw this bill on domestic markets. But this did not happen. The British government's bill states that some of its provisions will be effective, despite the inconsistency or incompatibility with international or national law. It is intended to regulate trade relations between member countries of the United Kingdom since the end of the transition period after the Brexit on December 31, 2020
This bill further complicates the process of UK's divorce from the EU. If the law is passed and becomes legally binding, it will give Britain the right to ignore the part of the Treaty of Braxit concerning trade with and from Northern Ireland with Ireland, with which it shares a 500 km border.
EU leaders have already said that this could lead to a reimpositioning of the tight land border and undermine the stability that has kept the peace since Northern Ireland signed the Good Friday Agreement in 1998.
However, London believes that the parties have already "sketched" a draft agreement. EU chief negotiator Michel Barnier, on the other hand, says there are many differences. All positive news comes only from the UK when the EU doubts the progress made. If you look from the side, it is quite obvious that the deal is not as close as London believes. Chances for Braxit without a deal are growing.
As early as Monday (today) the EU is gathering a summit, where Braxit will be discussed, among other things. Therefore, the growth of volatility will not be news for pound currency pairs.
Economically, Britain is not as bad as it is politically. This morning the data about British business activity was published, where the slowdown is not as strong as it was predicted. This is good for sterling, but the risks associated with Braxit outweigh the scale. On Friday, several volatile British data are expected: monthly and quarterly GDP and industrial output.
There was also a surge of volatility in the black gold market after the news that U.S. President Donald Trump had contracted coronavirus. But this impact was short-term. On the weekend, there was even news suggesting that Trump's recovery would be sooner.
Oil also received support from a growing workers' strike in Norway that resulted in the closure of four oil and gas fields. According to the Norwegian Oil and Gas Association, the strike could reduce the country's production capacity by 330 thousand barrels of oil equivalent per day or 8% of the country's total production.
But at the same time, Libya has shown almost three-fold production growth, which last week was 270 thousand barrels per day after Eastern forces eased the blockade of the country's oil infrastructure. According to OCBC economist Howie Lee, "The fragile supply shortage we have seems to disappear unless Libya produces an additional half a million barrels per day or more.
However, recent price increases have prompted some U.S. manufacturers to resume drilling. U.S. energy companies last week added six more rigs for oil and natural gas production. This is the second consecutive week of growth, which already suggests a pattern.
But the growth in supplies comes at a time when imports of crude oil into China are slowing down, which could lower oil prices, as JP Morgan analysts say in a note on October 2. In the near future, the OPEC countries and its allies OPEC + should agree on a reduction in supplies in November.
Taking into account introduction of new restrictions due to growth of new cases of coronavirus in some EU countries, it is logical to expect pressure on crude oil quotations in the short term.