FXE

Japan's preliminary September PMI was little changed from October, and the composite remained below the 50 boom/bust level.The French PMI showed a similar pattern to the German report, but a bit worse.The US preliminary PMI is expected to follow the European pattern of a continued recovery in the manufacturing sector and some softness in services.

The S&P 500 tumbled for its fourth consecutive, the longest losing streak since February. The dollar strengthened broadly.Asia Pacific shares were lower, led by a 2.4% decline in South Korea and around a 1% loss in China and Taiwan.Gold held yesterday's low near $1882.50. Last month's low was nearer $1863. It is poking above $1900 in Europe.November WTI slipped below $39 a barrel yesterday but has remained above there today and is testing the $40 area.

This article will cover four key macroeconomic themes for year-end 2020.These themes are the Treasury market, oil prices, US dollar foreign exchange rates, and China's economy.I believe these forces will determine the direction of the global stock markets.That is, higher Treasury yields, lower oil prices, stronger USD, and weakening of China's economy will push global stock indexes lower.

Not surprisingly, China's Prime Loan Rate was left unchanged for the fifth consecutive month at 3.85% and 4.65%, respectively, for the one and five-year benchmarks.S&P is concerned that Spain's political climate may struggle to pass the 2021 budget and continue to press ahead with reforms.Sterling encountered offers over the last three sessions around $1.30, and today it has been sold down to $1.2835.

The major central banks have met, and not one announced fresh policy action.All the brouhaha about the rapid rise of the euro misses that it has been moving sideways for nearly two months.With all the commentary on the euro, it was the yen, whose 1.6% gain last week, led the majors.It arguably was a cleaner way to express a bearish dollar view.

EUR/JPY has rallied, yet the Japanese yen remains attractive as a hedge against present and continued global uncertainties. Risk sentiment has no doubt helped the euro to beat the Japanese yen in recent weeks, but the upside may be short-lived, even if risk sentiment remains positive. Japan GDP growth technically out-performed the euro area this year. Meanwhile, the euro area is now flirting with deflation, which is not presently a problem for Japan. Furthermore, while EUR/JPY might be trading at a discount to fair value (using a long-term PPP model), I believe the current uncertainties that lie before us (including Brexit, which remains a risk to the euro area, not to mention COVID-19) could help to support an even stronger JPY premium. As head into the U.S. elections and the Brexit deadline at year-end, not to mention the new year in which fiscal interventions begin to unwind (and reveal which economies have been "swimming naked", to reference Buffett), the Japanese yen seems like a safe place to park capital.

EUR/AUD has traded lower recently, back in line with its previous trading range between 1.60 and 1.65.However, while risk sentiment and macroeconomic indicators seem to support downside, longer-term models indicate upside potential.The market may decide to take the 1.60 handle, and the recent lows below this handle, in the short to medium term.On the other hand, euro area terms of trade are holding up against Australia, and while Australia is flirting with deflation, ECB rates are unchanged on the year while the RBA cut rates from +0.75% to +0.25%.Provided the euro area can improve its economic record into 2021 (preferably to be "on par" with Australia), our longer-term Purchasing Power Parity model would suggest the potential for significant upside (even above the highs of this year of around 2.00). If recent lows below 1.60 are revisited, this might signal a buying opportunity.

Japan's August CPI was unsettling.The dollar has not been able to resurface above JPY105 today for the first time since late July.The Fed's balance sheet jumped by nearly $54 bln last week to $7.06 trillion, its largest since the end of June.Canada reports July retail sales.