Most equity indices traded lower yesterday, perhaps due to negative forecasts and data from the Eurozone and the US. Remarks by US President Trump over the US-China trade relationship may have also hurt investors morale. During the early EU session, the BoE kept its monetary policy unchanged, but noted that further stimulus could be introduced if deemed necessary.
The dollar continued trading higher against all but two of the other G10 currencies on Wednesday and during the Asian morning Thursday. It gained the most versus GBP, CAD, and NZD, while it underperformed only against JPY. The greenback was found virtually unchanged against NOK.
The strengthening of the dollar and the yen suggests that risk appetite was dented yesterday. Indeed, turning our gaze to the equity world, we can see that all but one of the major EU indices slid slightly more than 1%, with the exception being UK’s FTSE 100, which gained 0.07%. It seems that after the German constitutional court gave the ECB three months to justify its bond purchases, European investors remained concerned, with the EU Commissions GDP forecasts adding additional pressure. The Commission said that the Euro area economy could contract by a record of 7.7% this year. The FTSE was the sole gainer, perhaps due to the pound’s weakness. Remember that many companies of the index generate profits in other currencies, so in a weakening GBP environment, those profits worth more in pound terms. The British currency may have come under strong selling interest after the UK construction PMI for April showed that the sector suffered its biggest contraction in history. The PMI collapsed to 8.2 from 39.3 in March, a fall more than twice as large as the previous month.
The negative sentiment rolled over into the US session as well, with both the Dow Jones and the S&P 500 losing 0.91% and 0.70% respectively. Only Nasdaq gained (0.51%), aided by the continues rally in tech stocks. What may have extended the risk aversion into the US session may have been remarks by US President Trump, who said that he would be able to report whether China is fulfilling its trade obligations in around a week or two, adding to worries over whether the world’s two largest economies can eventually find common ground on the trade front. The fact that the ADP revealed a 20.2mn job losses may have also been a negative.
Investors’ morale improved somewhat during the Asian morning today, perhaps due to the much-better-than-expected trade data from China. The data showed that the nation’s surplus rose to USD 45.34bn in April from USD 19.93bn in March, with exports expanding 3.5% yoy instead of tumbling 15.7% as the forecast suggested. That said, Asian bourses failed to sustain gains. Even though, on its first trading day after Friday, Japan’s Nikkei gained 0.28%, China’s Shanghai Composite and Hong Kong’s Hang Seng lost 0.13% and 0.62% respectively.
As for today, market participants may – for another week – pay extra attention to the US initial jobless claims. Expectations are for another jump in people signing for unemployment benefits for their first time. Specifically, expectations are for 3mn new claims, with continuing claims expected to have hit 19.9mn. Such a jump may serve another round of risk aversion, meaning lower equities and higher safe havens, but bearing in mind that the financial community has already being digesting the economic wounds from the fast spreading of the coronavirus, we don’t expect the reaction to be a long-lasting one. We stick to our guns that with governments around the globe easing their lockdown measures, and with a potential vaccine perhaps being ready for distribution soon, risk sentiment could rebound again in the following days, if not today. That said, we have to repeat that this is conditioned upon no new negative headlines surrounding the US-China trade saga, and no raising restrictive barriers too early.
Nasdaq 100 continues to slowly grind higher, while balancing above its short-term tentative upside support line drawn from the low of March 23rd. However, the price still remains below the highest point of April, at 9155. Although there is a chance for the index to drift further north, we will wait for a break of the 9155 barrier, in order to examine higher areas. Hence why we will take a cautiously-bullish stance, for now.
A strong move above the 9155 hurdle may attract a few more buyers, as it would confirm a forthcoming higher high. Nasdaq 100 could then travel to the 9403 obstacle, which is the low of February 21st. The price could stall there temporarily, however if the bulls still have the upper hand, another boost could bring the index to the next potential resistance area, at 9508, marked near the lows of February 13th, 18th and 20th.
In order to shift our attention to possible deeper extensions to the downside, we would need to see, not only a break of the aforementioned upside line, but also a price-drop below the 8570 hurdle, which is the current lowest point of May. If the fall happens, this will confirm a new lower low and the index could travel further south, possibly testing the 8356 zone, which is the low of April 21st. Nasdaq 100 might stall there for a bit, or even retrace slightly higher. That said, if the price remains below the 8570 barrier, this might lead to another round of selling. This time the index may overcome the 8356 obstacle and target the 8085 level, marked by the low of April 12th.
The pound was the main loser among the G10s, and as we already noted, the reason may have been the tumble in the construction PMI. Today, during the early European morning, we had a BoE decision, with the Bank keeping its monetary policy unchanged. Via a unanimous vote, officials kept interest rates on hold, while with regards to their QE program the vote was 7-2 in favor of keeping the amount of purchases unchanged. The two dissenters, Saunders and Haskel, preferred to increase the target for the stock of asset purchases by an additional GBP 100bn. In the accompanying statement, the Bank noted that the existing stance of monetary policy remains appropriate and that they will continue to monitor the situation closely, and consistent with their remit, they stand ready to take further action if necessary.
The pound reacted positively at the time of the announcement, perhaps as there was market speculation that the Bank may increase its QE purchases target at this gathering. That said, the two dissenters, the overall readiness of the Bank to ease further if needed, and the fact that in the statement officials noted that the current QE is to reach its target at the beginning of July, suggest that more action may be on the cards for the months to come. Further easing may prove positive for the UK’s stock market, and negative for the pound.
For now though, investors may turn their gaze to the quarterly Inflation Report, the minutes and the first press conference by the new Governor, Andrew Bailey, all scheduled later in the day. They may be eager to find out the policymakers’ view on how hard the UK economy was hit from the virus spreading, and how long it will take before a recovery starts. They may also listen to the Governor very closely, in order to figure out how soon further stimulus could be introduced. If the forecasts paint an ugly picture and Bailey hints that further action may come as soon as at the next gathering, the pound may give back its decision-related gains.
Having said all that, the currency’s overall faith may also depend on developments surrounding the Brexit sequel, which has been overshadowed by the pandemic. As soon as the virus situation eases, market participants may well turn their gaze back to Brexit, and with PM Johnson insisting to the December deadline for the transition period, it seems that the currency could be poised for a bumpy ride.
This morning, GBP/USD rebounded somewhat, after the BoE IR decision. Overall, the pair remains within a wide range, roughly between the 1.2164 and 1.2647 levels. From the very short-term perspective, the rate is drifting lower within that range, while trading below a short-term tentative downside resistance line taken from the high of April 30th. As long as GBP/USD stays below that line, we will remain somewhat bearish.
A small push a bit higher could bring the rate to test the aforementioned downside line, which if stays intact, could attract the bears back into the game. If so, the pair may slide again, possibly overcoming today’s low, at 1.2310, and traveling to the1.2247 hurdle, which is the low of April 21st. If the selling doesn’t stop there, the next potential support area could be near the 1.2164 level, marked by the lowest point of April.
Alternatively, if the previously-discussed downside line breaks and GBP/USD gets pushed above the 1.2483 barrier, which is the high of May 5th, this could invite a few extra buyers into the arena. Such action might help the pair to rise to the 1.2564 obstacle, a break of which may send the rate to the 1.2642 and 1.2647 levels, marked by the highs of April 30th and 14th respectively.
Besides the US jobless claims and the BoE Inflation Report, the only other release worth mentioning is Canada’s Ivey PMI for April, which is expected to have slid to 25.0 from 26.0.
As for tonight, during the Asian morning Friday, Japan’s household spending for March is expected to have slid 4.0% mom after rising 0.8% in February. The RBA’s quarterly MPS (Monetary Policy Statement) is also coming out. The report includes the Bank’s updated economic projections.
With regards to the speakers, apart from BoE Governor Andrew Bailey, we have another one on today’s agenda and this is Philadelphia Fed President Patrick Harker.
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