The number of new Covid-19 cases dominated the headlines at the back end of last week and it is likely to be at the forefront of traders’ minds this week.
Equity markets took a hammering on Thursday as a number of US states confirmed there was an increase in fresh coronavirus cases, which was a result of a loosening of restrictions. Stocks recovered some ground on Friday, but the rebound wasn’t too strong as European indices finished off the highs of the session, in fact the DAX ended slightly in the red. The US markets were at one point in negative territory, but they finished higher by the end of the day.
In the past few months economies have reopened, which in turn has assisted economic activity and greatly lifted sentiment in the markets. Recently we have seen multi-month highs in some indices, metals and energies as governments appeared to be getting a handle on the health crisis. Dealers are now cautious that there could be a second wave of the pandemic on account of economies being reopened.
When the virus was spreading like wildfire at the start of the year, traders ran for the hills as they thought the lockdowns were about to cripple the global economy. The health crisis was an unknown and that was a factor too, but now experts have far greater knowledge of Covid-19 so some of the fear has faded. Should new cases continue to rise, governments should be in a better position to manage the situation as they have gained some much-needed experience in tackling the issue. This could trickle down to the markets, so perhaps traders might get used to the idea of the odd jump in cases from time to time as long as things are unlikely to spiral out of control, like they did at the start of 2020.
‘Markets don’t move in straight lines’ is a well-known phrase in trading, and stocks enjoyed a very bullish run between late March and early June, as nations were easing their lockdown restrictions, so Thursday’s massive sell-off could turn out to be a bump in the bullish road, rather than the beginning of a major reversal in sentiment. For too long dealers largely heard stories about falling infection rates, so a relatively small increase came as a big shock. An occasional jump in cases might become the new normal.
A partial lockdown was reintroduced in Beijing over the weekend on account of a jump in new Covid-19 cases. It is believed the cases were linked to a food market. The coronavirus is also an issue for Tokyo as the Japanese capital reported 47 new cases – its highest level in over one month. According to Reuters, several US states, such as Florida, Texas, North Carolina and South Carolina, all posted an increase in new cases, so dealers will be monitoring the health situation.
Overnight, China posted a number of economic reports for May. Fixed asset investment came in at -6.3%, while the consensus estimate was -5.9%. The April reading was -10.3%. Industrial production was 4.4%, while the consensus estimate was 5%, and the previous level was 3.9%. The retail sales reading was -2.8%, and economists were expecting -2%. Keep in mind the last report was -7.5%. The figures point to an economy that is experiencing a slow bounce back, so traders will probably take the view that western economies will also undergo a similar situation. Stocks in Asia are in the red.
The US dollar has been good at attracting safe-haven funds recently. The greenback pushed higher at the back end of last week on account of the renewed health fears. Last week, the Fed kept rates on hold, meeting forecasts. Jerome Powell, the head of the Fed, issued a pretty dire outlook for the US economy. He believes the US economy will contract by 6.5% in 2020, and by the end of the year the unemployment rate will be 9.3%. Earlier in the week, the World Bank and the OECD issued bleak projections for the global economy, so traders have had their fill of negative forecasts.
Gold is still in good shape despite the positive move in the US dollar at the end of last week. The metal is well above the $1,700 mark, in fact by the close of play on Friday it was within 2% of the May high, which was its highest level in over seven years.
At the beginning of last week, oil eked out a three-month high as Brent crude and WTI were in demand on the back of optimism surrounding economies being reopened, and cuts to production from OPEC+. The energy market was hit by the renewed health fears as dealers cut their long positions as they felt that demand would be hit should rising infection rates impact the easing of lockdown restrictions. Oil ended down on the week, but it rallied for the six weeks previous. Late on Friday, the Baker Hughes report showed the number of active oil rigs in the US fell by seven to 199.
As of today, all shops in England will be allowed to re-open but they will have to follow strict social distancing polices. The French government are taking steps to speed up the easing of the lockdown so the country’s health situation will be monitored in the coming weeks.
Not much progress has been made in relation to the UK-EU’s post transition period relationship deal. Prime Minister Johnson is set to tell the EU he wants a deal by August at the latest. Mr Johnson is willing to walk away if Brussels are not willing to compromise.
At 9am (UK time) the final reading of Italian CPI for May will be posted. Traders are expecting -0.2%.
The New York Fed manufacturing report for June is tipped to rise from -48.5 to -27.5. The update will be posted at 1.30pm (UK time). A reading of -27.5 would still be horrendous, but in the current climate traders will just be focused on whether the level improves or not.
EUR/USD – has been pushing higher since early May and if the bullish run continues it might target 1.1495. If there is a pullback, it might find support in the 1.1200 region, and a move through that area, could see it target 1.1022.
GBP/USD – Thursday’s daily candle has the potential to be a bearish reversal and it might target 1.2417, the 50-day moving average. A move higher could run into resistance at 1.2680, the 200-day moving average.
EUR/GBP – has been in an uptrend for over one month and if it retakes 0.9054, it might target 0.9239. A move lower might find support at 0.8839, the 50-day moving average.
USD/JPY – has been driving lower in the past few sessions and support could come into play at 106.00. A rebound might run into resistance at 108.42, the 200-day moving average.