Monday’s Bullseye: 3 August 2020

Here is our week ahead preview for the week commencing 3rd August  2020. 

As the month of July draws to a conclusion, the underlying themes driving the markets over the past few months has not changed materially – even if European stocks fell sharply on Thursday. But the new month could see some trends start to change.

Now usually I provide a weekly preview on Fridays, but since today will be the last day of the month I thought to change it up a little and provide a somewhat longer-term macro outlook. However, I will still provide the upcoming weekly highlights for data and earnings. Anyway, I think that August will be a different month for the markets. The dollar could make a potential comeback and a correction may be in store for US stocks. Even the rally for precious metals may come to a halt. Below I will explain why. Let’s start with precious metals, my favourite market.

Gold and silver have enjoyed one of their best months ever. With such strong bullish momentum, not to mention the still-supportive fundamental backdrop, you would have to think it is almost a matter of time before gold hits the $2K hurdle. I reckon there is good a chance it may even get there today. Bond yields are likely to remain depressed for a long time due to ongoing concerns over the speed of the economic recovery and the potential for the virus to hang around longer than expected. There are no guarantees the vaccines under development will be successful when they are finally approved and made available. Confidence is another problem. A lot of people are just scared to live their normal lives and spend like they did before. Some jobs are lost for good. It will be very difficult for the world to return to normal. So, central banks and, to a lesser degree, governments will likely keep providing stimulus for a while yet. But my only major concern for precious metals is the dollar…

The dollar fell sharply in recent months because of ongoing risk appetite and a dovish Federal Reserve. However, with coronavirus making an unwelcome comeback to parts of Europe, the euro may come under pressure again as we head into August. Commodity dollars could also head lower if risk appetite turns decisively sour. So, it is also possible that the US dollar could rise from the ashes as Covid-19 cases in the US start to drop and the most populous states open up again. If the dollar comes back and given that precious metals have risen so sharply recently and appear overbought, I wouldn’t rule out the possibility of a correction at some point in August.

Thanks to ongoing government and central bank support, robust earnings from the big US technology firms and mixed earnings from other sectors, the US major indices were all higher and looked set to finish in the positive for the fourth consecutive month.

However, the major European indices except the DAX were lower on the month, potentially snapping a three-month rally (unless we get a sharp rally today). European stocks have been held back to some degree by a stronger euro and pound. With large proportions of profits for the European companies made in dollars and other foreign currencies, a rising exchange rate means once profits are converted back into euros or sterling, they are worth less. But as mentioned, the possibility of a rebounding US dollar may mean European indices could outperform their US peers in the coming months, although this does not necessarily mean they will rise.

With the impact of past stimulus measures fading and given some evidence that the global recovery has already stalled, it remains to be seen what will help keep global stock markets elevated in the coming months, especially US stocks. You would have to think that the current levels of the major US indices, which are at or near record levels do not correctly reflect the ongoing economic climate. So, there is a risk we may see a correction in August, although it doesn’t have to be as severe as the one we saw in March, for things have since improved and monetary conditions are even more accommodative.

US investors will start looking forward to the upcoming election. With the business-friendly Donald Trump being behind in the polls, investors may start worrying about the prospects of a less business-friendly US president in Joe Biden. Such worries could see investors start booking profit in their profitable positions. Thus, whichever way you look at it, the potential upside for US stocks look limited from here.

Whether I am correct remains to be seen, and if I am it could still be weeks before the trend changes. As far as the upcoming week is concerned, here are the data and earnings highlights:
  • Japan Q2 GDP
  • Chinese Caixin manufacturing PMI
  • Eurozone final manufacturing PMIs
  • ISM manufacturing PMI and construction activity
  • Company earnings: HSBC, Société Générale, Heineken and Siemens
  • RBA
  • US factory orders
  • Company earnings: Walt Disney, Beyond Meat, Baidu, Sony, Diageo, BP, Bayer, Mitsubishi UFJ Financial Group
  • NZ employment data
  • Eurozone final services PMIs
  • US ADP payrolls report, ISM services PMI and crude oil inventories
  • Company earnings: Roku, Modern, Allianz, BMW, Deutsche Post, Legal & General, Deutsche Post, Thomson Reuters
  • German factory orders
  • Bank of England rate decision
  • US unemployment claims
  • Company earnings: Nvidia, Uber, Toyota Motor Corp, Siemens, Munich Re, Glencore, Crédit Agricole, UniCredit, Adidas, Aviva and ING
  • Chinese trade figures
  • US nonfarm payrolls report
  • Canadian jobs report
  • Company earnings: Hargreaves Lansdown
In the upcoming week, European company earnings will take centre stage, which should provide plenty of opportunities for stock traders. For FX traders, they will be plenty of data, not least the jobs reports from the US and Canada, as well as some potentially market-moving events earlier in the week. With the focus being on European stocks, the German DAX is or featured chart for the week ahead:

Source: and ThinkMarkets