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Written by: Craig Erlam | OANDA Europe
The European surge isn't rubbing off on Wall Street yet, with US futures pointing to a flat open after two strong days for stock markets on that side of the pond.
Here in Europe, we're probably seeing a little carry over momentum from the afternoon US session on Wednesday, where stock markets thrashed out new records. And not only was the rally not driven by tech, many of the big names actually sat this one out with Apple falling 2% after being down more than 5% at one stage and Tesla dropping 6.6%, an improvement on the 15.42% plunge earlier in the session.
The broad based nature of the latest rally is encouraging and suggests there's more to it than just pandemic-proof tech firms asserting their dominance over US indices. The more broad based this becomes, the more it signals a turning of the tide as far as the economic outlook is concerned, at least among those on Wall Street.
Europe buoyed by stimulus
Europe has suffered a number of setbacks in recent weeks as a rise in Covid cases across the continent has led to renewed travel restrictions and taken the wind out of the sails of the economic recovery, which until then had exceeded expectations.
The recovery fund agreed by the 27 member bloc gave cause for optimism over the summer and this is now being compounded by national stimulus efforts, with France looking to relaunch its economy with a €100 billion package and Germany backing plans for further extraordinary deficit spending next year, having already extended its employment subsidies to the end of 2021. Countries are not taking this pandemic lightly and the latest spikes are just a reminder of the damage it will continue to cause.
This was evident in the PMIs this morning, with countries like Spain and Italy that have suffered significant spikes seeing a contraction in the services sector once again. Combined with the inflation data, which went negative earlier this week, there's a growing case for more stimulus from the ECB in the coming months.
Profit taking kicks in as US gasoline demand falls
Oil is sliding for a second day, potentially bringing an end to weeks of consolidation and bringing about a correction in crude prices. A decline in US gasoline demand last week from 9.16 million barrels per day to 8.78 million appears to have been the catalyst for the drop in oil prices, with other factors then compounding the losses. Impending refinery maintenance, the end of the summer driving season and Iraq seeking an extension for compensation cuts are among the factors have all been touted as reasons behind the move.
The reality is that we're probably just looking at an exhausted recovery trade and longs are bailing. Crude has struggled to make a significant headway to the upside for weeks and the 200 day moving average in WTI and Brent is holding firm. We're probably just seeing some unwinding of positions and a brief correction, nothing to worry about. As far as levels are concerned, $42 and $40 in Brent look very interesting, as does $39 in WTI.
Data to deliver the knockout blow
The dollar doesn't know when it's beaten, with the greenback staging another recovery within days of hitting a fresh low. The dollar index is pushing 93 and has its eyes set on the late August highs around 93.50. This isn't good news for gold, which appeared to be finding its feet prior to the ISM PMI on Tuesday and its all been downhill from there.
US yields remain low though, probably thanks to the Fed's assurance that rates are going nowhere any time soon even if the economy rebounds and runs hot. There's plenty of data coming from the world's largest economy over the next 24 hours or so. The question is, what's getting the knockout blow, gold or the greenback?