The FTSE 100 closed higher yesterday as a softer pound helped the market.
The international nature of the British index means that a slide in sterling tends to give certain constituents a boost. The rest of Europe was a mixed bag as the DAX and the CAC 40 ended the day in the red while the FTSEMIB posted a decent gain.
It was a lacklustre trading session as concerns about a second wave of the coronavirus crisis played on traders’ minds. Countries such as China, South Korea and Germany have eased up on lockdown restrictions, which was seen as progress, but sadly the countries have seen an increase in the rate of new Covid-19 cases. The rate of new infections hasn’t been huge, but it has been enough raise a few eyebrows. Governments have navigated their way through the pandemic so far, so it is likely they will be able to deal with any resurgences along the way.
The UK government only recently mapped out plans to slowly unwind the lockdown restrictions. If other countries are encountering issues on account of reopening their economies, it might actually be useful from a health point of view. The pandemic is a major learning process for everyone, so the British government might be able to learn from other nations that are further along in the process.
US equity markets finished the session in the red. Dr Antony Fauci, the director of the National Institute of Allergy and Infectious Diseases, cautioned that ‘ suffering and death’ could be a consequence of reopening the economy too quickly. The S&P 500 dropped over 2% and the NASDAQ composite finished lower following six consecutive days of gains.
Jerome Powell, the head of the Fed will be speaking today at 2pm (UK time), and traders will be listening carefully to what he has to say as he might drop hints about future change in policy. The central banker might use the opportunity to nip the negative rates chatter in the bud.
Stock markets in Asia are a little lower as the negative sentiment from the US session spilled over to the region. The CMC NZD index is down 1.2% as the RBNZ doubled its QE scheme and suggested that negative rates might be in the pipeline.
The pound came under pressure yesterday after it was revealed the UK government would extend the furlough scheme until October, without any change to the existing terms. Workers who have been furloughed because of the health emergency will continue to receive 80% of their wages – there was speculation the rate would be cut to 60% of earnings. The full extension of the initiative will be of great assistance to those taking part in the programme, but it be costly to the UK government, hence the fall in the pound. In a roundabout way, the UK economy will benefit from a more generous furlough scheme, as those workers will probably spend more, which will have a ripple out effect.
The US dollar drifted lower yesterday too as it handed back some of the ground that it had made since the start of the month. Since the end of March, the US dollar has broadly moved higher as it has made a couple of higher lows, but it lacked the momentum to set higher highs. Volatility in the major currencies has been low recently.
The oil market rallied yesterday as supply woes helped lift the energy. WTI enjoyed a rally while Brent crude’s positive run ended up fizzling out. On Monday, Saudi Arabia said it will cut production by an additional one million barrels per day (bpd) from June. In April it was announced that OPEC+ would cut output in May and June by 9.7 million bpd, which is a very steep fall in production. In July, cuts will begin to taper off and output will be lowered by 8 million bpd for the remainder of the year. Yesterday, it was reported that a number of sources connected to OPEC+ claimed the group wants to keep the 9.7 million bpd cut in place beyond June. The oil market has rebounded in the past couple of weeks, so it is possible the body are keen to prop up the energy.
At 7am (UK time) the UK preliminary reading of first quarter GDP will be posted, and on a quarter-on-quarter basis economists are expecting -2.5%, while 0.0% growth was registered in the last quarter of 2019. At the same time the latest UK manufacturing production, construction output and industrial production reports will be posted, and the consensus estimate is -6%, -7.1% and -5.6% respectively.
Eurozone industrial production for March is expected to be -12%, which would be a sharp decline from the -1.9% registered in February. The update will be posted at 10am (UK time).
At 1.30pm (UK time) US PPI and core PPI will be revealed, and traders are expecting -0.4% and 0.9% respectively. It is worth noting the CPI data yesterday came in below the low expectations. The headline update was 0.3%, while traders were expecting 0.4%, and the prior level was 1.5%.
The EIA report will be in focus today as it will give a gauge of US demand for energy. Oil stockpiles are expected to be 4.29 million barrels, while gasoline inventories are expected to fall by 2.32 million barrels.
EUR/USD – has been range bound recently and a break below the 1.0768 area should pave the way for 1.0636 to be tested. A move higher from here might run into resistance at 1.1000.
GBP/USD – has lacked direction recently, but while it holds below the 50-day moving average at 1.2371, the bias should remain to the downside, and it might target 1.2165. The 200-day moving average at 1.2650 might act as resistance.
EUR/GBP – while it holds above the 100-day moving average at 0.8659, the bias might remain to the upside, and 0.8865 might act as resistance. A break through 0.8659 might pave the way for 0.8600 to be tested.
USD/JPY – has been pushing lower since March and a break below 106.00 might see it target 104.00. 108.22, the 200-day moving average, might act as resistance.