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A tale of two markets: US vs Europe recovery

 In Newsletter, Newsletter Pro

Issue 142

Assets Covered: COMEX Copper Futures, Copper (LME), USS&P 500 Stock Market Index, Germany DAX 30 Stock Market Index, ICE USD Index Futures, EUR/USD

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2020 has wreaked havoc on economies globally. GDP plunged by double digits in most places. China was hit early, but most Western markets saw their worst slowdowns in March and April as governments locked down hard.

 

We’ve seen encouraging signs as Germany’s retail sales and unemployment show solid signs of progress. In fact, Germany’s August retail sales were higher than January’s pre-pandemic levels, suggesting consumers have already shrugged off Covid worries.

 

US retail sales also reached pre-pandemic levels in August. This is good news, for sure, but the rate of growth has slowed over the past month. The unemployment picture is also positive, but still worrisome. This week’s ADP National Employment Report delivered a healthy 749,000 jobs. The expectation was a huge over delivery of the expected 650,000 jobs and well ahead of the 481,000 jobs created in August.

 

Friday’s official US Labor Department data showed a fall of the unemployment rate to 7.9% from the 8.4% rate in August. Nonetheless, recovery concerns remain as small businesses continue to die, the airline sector loses billions every month, and even Disney announces major layoffs.

 

As we look at equity markets, it’s clear that Germany’s DAX (right-hand axis) and the US S&P 500 Index (left-hand axis) are highly correlated. This isn’t news – both are highly advanced and well-capitalized economies. But we expect a divergence in Q4. While Complete Intelligence’s forecast shows the DAX equity market recovery may stabilize, we’re forecasting the S&P 500 to see a setback in Q4.

 

USA S&P 500 and Germany DAX 30 Index Forecast for November 2020Unites States S&P 500 Stock Market Index (SPX) / Germany DAX 30 Stock Market Index (DAX) forecast through November 2020
CI Futures generated this chart. Book a demo to see it live in action.

 

We also expect the Euro (left-hand axis) to continue to show strength against the US Dollar. Our forecast shows Dollar Index Futures (right-hand axis) rising slightly into November, with a further fall into December. This Dollar index is heavily weighted with the Euro and other European currencies, so the inverse relationship is no surprise here, but it’s illustrative of the lacklustre near-term expectations for the Dollar.

 

 

CHRIS/ICE USD Index Futures (DX1) / EUR/USD Rate Forecasts through November 2020

ICE USD Index Futures (DX1) / EUR/USD Rate Forecasts through November 2020
CI Futures generated this chart. Book a demo to see it live in action.

 

 

Finally, we look to industrial metals with US vs Europe bases to understand the price pressures on physical goods. We’ve generally seen COMEX copper prices (left-hand axis) move very much in line with LME copper prices (right-hand axis). Copper seems to be a global market, yet our forecast expects this relationship to break down slightly in Q4. We expect US-based copper prices to fall slightly into the end over the year relative to European copper prices, as an indicator of slightly weaker industrial demand. The relationship is expected to be re-established in 2021, but for the remainder of 2020, sluggishness in the US will hold COMEX copper back slightly.

 

COMEX Copper Futures (HG1) / Copper (LME) Forecasts through November 2020

COMEX Copper Futures (HG1) / Copper (LME) Forecasts through November 2020
CI Futures generated this chart. Book a demo to see it live in action.

 

 

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