What has happened
US technology shares saw a welcome rise on Wednesday, ending a three-day losing streak, although the positive move only partly offsets the past week’s correction. Closer to home, while Sterling steadied on Wednesday, holding around $1.30 against the US Dollar, the same couldn’t be said for UK-EU relations, which on the surface appeared to see a fresh deterioration. Following the publication of the UK government’s Internal Market Bill on Wednesday, the European Commission (EC) confirmed that the plans violated the terms of the UK-EU Withdrawal Agreement. The EC President Ursula von der Leyen tweeted that she was ‘very concerned about announcements from the British government on its intentions to breach the Withdrawal Agreement. This would break international law and undermines trust’. This provides an unhelpful backdrop to this week’s eighth round of UK-EU negotiations which are expected to conclude later today.
California coronavirus case growth continues to fall
California, the most populous US state reported a continued fall in coronavirus cases on Wednesday according to the California Department of Public Health. Wednesday’s announcement which relates to 8 September data, saw 1,616 new cases which was the smallest daily increase since mid-May. Having suffered more cumulative coronavirus cases than any other US state, Rt.live data separately estimates that California’s coronavirus reproduction rate is now down to 0.82, where a reading below 1 suggests the rate of infections will continue to slow.
Markets to focus on the European Central Bank
Later today, the European Central Bank (ECB) releases its latest monetary policy meeting decision, where markets are hoping for a dovish-tilt to messaging. The central bank is also due to release their updated macroeconomic forecasts, and of interest yesterday, Bloomberg carried a headline saying that these were said to show more confidence in the economic outlook, prompting a gain for the Euro currency yesterday to push back up through $1.18 against the US dollar. With the ECB Chief Economist Philip Lane last week reminding markets that ‘the euro dollar rate does matter’, we would expect currency markets to be especially sensitive, The central bank is not expected to make any changes today to either its €1.35 trillion emergency bond-buying program, or its minus -0.5% deposit rate. However, with last week’s initial euro area inflation print for August coming in at minus -0.2% YoY, and the first decline since May 2016, the ECB President Christine Lagarde is likely to be quizzed in her press conference on the likelihood or otherwise for more stimulus later this year.
What does Brooks Macdonald think
With the recent increased volatility in technology stocks, technicals and not fundamentals look to be in the driving seat in the short-term. The fact that the technology sell-off hasn’t been matched with any corresponding pickup in risk aversion for either broader equities or corporate credit spreads for example, is positive. It helps to support the narrative that technical-driven moves around single stock derivative exposures has been the principle driver. Longer-term, it is important to keep in mind that the constructive backdrop for growth assets such as technology remain in place, as lower interest rates for longer encourage investors to continue to look further out along their investment horizons.