FTSE: EU stocks off lows as US fiscal stimulus stalemate continues


European stock markets recovered from being sharply lower earlier in the day, lifting US index futures off their worst levels.



Sentiment remains cagey, though, as investors are continuing to wonder whether the US stimulus package would be delivered before the election as talks between the Democrats and Republicans continue, but without any significant progress.
 
Resurgent virus poses risk to recovery
 
European markets had earlier dropped as investors grow increasingly concerned about the impact of the virus infections. Germany reported a record jump in new cases, while the situation in Spain means the country has become the first European nation to report more than 1 million infections. Many other European countries are also struggling with the resurgent virus cases. The UK reported 26,688 more coronavirus cases as well as 191 deaths on Wednesday. Restrictions have been tightened across many European cities, and Greater Manchester will enter tier three restrictions just after midnight.
 
At this rate, the economic recovery could stall very quickly if authorities do not act quickly. The European Union recovery fund should start as soon as January to provide the necessary relief to the nations hit by the pandemic, is what Italian Prime Minister Giuseppe Conte urged on Tuesday.
 
New government scheme to support workers and small businesses
 
Meanwhile in the UK, Chancellor Rishi Sunak has today unveiled further government support for jobs hit by coronavirus restrictions. Big changes have been made to the Job Support Scheme (JSS), which is set to replace furlough in November. Employers will now pay less, and staff can work fewer hours before they qualify for the scheme, while the taxpayer subsidy has been doubled. The news helped to lift the FTSE off its lows, while preventing the pound from giving up too much of its gains made the day before, when hopes rose that the UK and EU will be able to make progress in the trade talks.   
 
US fiscal stimulus stalemate continues
 
Meanwhile, as far as a US stimulus package is concerned, there is a risk that even if the bill is agreed upon it may still not get past the Republican-controlled Senate, who are calling for a much smaller relief bill of $500 billion. In contrast, the Democrats want a $2.1 trillion bill. Then there is Donald Trump, who has said he will be happy to sign a $1.9 trillion bill. So, there are three parties involved, which is why lawmakers have had difficulty in making significant progress in their talks.
 
It is difficult to see how the impasse will be resolved and the debate could continue for a while yet. Even if President Trump were to be re-elected for a second term, it is widely expected that the Senate would still be controlled by the Republicans, meaning it will be difficult for him to push the bill through. But if the Democrats win, and assuming the outcome of the elections will not be contested by Trump, then the new administration would be unable to enact anything until Joe Biden is sworn in as President in January.
 
So, whichever way you look at it, the possibility for an imminent resolve in the impasse looks unlikely.
 
Trump vs. Biden: Final Round
 
Meanwhile, the final presidential debate before the election between President Donald Trump and Joe Biden will be taking place tonight in Nashville, Tennessee. Trump will need to perform a lot better than he did in the previous occasion if he has any chance of closing the gap in opinion polls in a meaningful way.
 
FTSE in focus as hopes over Brexit deal rises and amid new government support
 
I was going to share a chart of a US index here, but given the rising virus infections and new restrictions in Europe, it is worth keeping a close eye on the major European indices such as the CAC, DAX and FTSE instead. The latter, which has underperformed since the markets bottomed in March, could be the one that might now outperform given the increased optimism over a resolution on the Brexit deadlock and the government’s fiscal response to the new restrictions.
 
 
From a technical point of view, the UK index is currently around levels where it could potentially carve out a major low here:

FTSESource: ThinkMarkets and TradingView.com
 
As can be seen, the index earlier dropped below the prior lows around 5765-5770. But after taking out liquidity there, it has refused to hold below. So, it may be in the forming carving out a potential false break reversal pattern here. For confirmation, we will still need to see a higher high above the most recent high at 5962, which is some distance away from current levels. But the early signs are positive.
 
However, if the index later turns lower again and closes the day below that 5765-5770 range, then this will invalidate any bullish signals that the index has created so far in the session. Should this scenario play out, then I would expect a continuation lower towards the retracement levels shown on the chart, with the 50% retracement against the March low coming in at 5650.



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