... uncertainty due to the next round of US fiscal stimulus and the upcoming US presidential election means investors are proceeding with a bit of caution
After a very positive start to the week, European stock indices gave up a chunk of their gains in the first half of today’s session. Banks, which had rallied sharply the session before, led the declines, suggesting the weakness was due above all to profit-taking. Investors were hesitant to take on too much risk as the first presidential debate begins later today while there is growing uncertainty over the next round of fiscal stimulus that is being debated by the Democrats and Republicans. Concerns that there may be more lockdown measures to curb the resurgent virus in parts of the world, including in London, and ongoing Brexit situation adds to the uncertainty. Still, judging by Monday’s big rally, investors appear to be warming towards equities and other risk assets again. Monday saw money flow into stocks; today we have seen a few major currency pairs break higher, including the AUD/USD and EUR/USD, while gold and silver have added to their gains from the day before.
Ignoring the day-to-day volatility, the current environment overall remains supportive for risk assets – although uncertainty due to the upcoming US presidential election means investors are proceeding with a bit of caution. Whether we agree to it or not, central bank support has been the main driver behind equity prices over the years, repeatedly offsetting economic, geopolitical and valuation concerns. In recent weeks, central bankers have made it crystal clear that interest rates will remain very low for a long time to come and will be there to provide further QE stimulus if needed. But investors are not sure what type of fiscal support they will get post US elections as the race is too tight to call.
Meanwhile the relatively lower COVID-linked deaths in this second wave of the virus means investors are not showing too much concern towards rising cases like they did back in March. Instead, they remain optimistic over the potential approval of a vaccine soon, which together with ongoing central bank support will probably help accelerate the recovery once the vaccine becomes available.
In the UK, investor sentiment is turning cautiously optimistic on signs that the UK and EU officials are finally making some progress as we enter the critical phase of Brexit negotiations. This is why the pound rallied sharply on Monday. But the optimism didn’t cause the FTSE to rise much and it has already given up its entire gains made the day before. Still, with the Bank of England raising the prospects of negative interest rates, and with a potential positive outcome from Brexit talks, the FTSE stands ready to benefit significantly as it has not yet joined the post-lockdown global equity market rally.
From a technical standpoint, the UK benchmark index may have carved out a double bottom reversal pattern
around 5770 over the past few weeks:
We need to see the breakdown of some resistance levels in order for this double bottom pattern to become validated. A move north of the bearish trend line could be just that, but ideally a new high above the most recent peak at 6127 for extra confirmation.
It is important that support at around 5880 holds now. This was the head of the hammer candle formed at the lows on Friday (circled). A daily close below 5880 would not be ideal for the bulls.