With UK and US markets off yesterday, markets in Europe picked up from their strong gains last week to get off to another good start, with the German DAX breaking upward and hitting its highest levels since Friday 6 March, as it starts to fill the price gap between the Friday close at 11,541 and the opening price of the Monday of the following week.
A couple of corporate stories helped smooth the way as reports filtered through that Germany’s troubled national carrier Lufthansa was on the brink of €9bn bailout deal from the German government, while German pharmaceutical giant Bayer also surged on reports that it reached agreements on some of its “Roundup” lawsuits in the US.
The French government also seems to be keen to step in with similar rescue packages of their own with reports that Renault, which is already 15% owned by the French government, could receive further state funding.
Combined with a better-than-expected German IFO report for May, along with further relaxations of lockdown restrictions as economies across Europe continue to open up, has encouraged a belief that the worst is behind us in terms of death and infection rates as well as economic shutdowns.
The jury still remains out in terms of the longer-term economic effects, and possible economic hysteresis, however that appears to be a discussion for another day for a lot of investors.
With European governments conveniently ignoring EU state aid rules, it is perhaps inevitable that pressure for the UK government to follow suit will grow. It is already being reported that a number of big UK employers are knocking on the government’s door, including Jaguar Land Rover, amid reports that the UK government is considering a similar response, in something called Project Birch.
For now, investors also appear to be ignoring weekend unrest in Hong Kong as Chinese authorities take further steps to reinforce their political will in the day to day running of Hong Kong. An escalation here, with the US mulling sanctions on China over the new security law, is likely to be a clear and present danger, among many others, to investor confidence in the days and weeks ahead.
Asia markets have continued in this vein, rising sharply on reports that Japan is also easing its remaining emergency measures, while news that American firm Novavax is set to start its first human studies of its experimental coronavirus vaccine also provided a boost. With UK markets set to play catch-up this morning, we can expect to see a very strong open for the FTSE 100, with other markets in Europe also set to open higher and build on the gains made yesterday.
Yesterday Prime Minister Boris Johnson outlined the UK’s own plans to ease the lockdown further, saying that local street markets and car dealerships could begin to reopen from next week, if they follow social distancing guidelines, while other non-essential retail could follow on 15 June if they follow the supermarket model that is currently in use by food retailers.
As if to highlight the challenges facing the retail sector, today’s CBI retail sales for May are expected to see another record drop from -55 to -65, when they are released later this morning.
On the data front we’ll get to focus on the latest US consumer confidence numbers for May, which are expected to be pretty awful. In April we saw a big plunge to 86.9 in the wake of the millions of jobless claims that came through on a weekly basis. Since then the rise in claims has continued albeit slightly more slowly, but still in the millions.
Against this sort of backdrop, it is hard to see how this could improve consumer confidence, yet that is what is being predicted by some forecasters. With another 15m added to the jobless numbers it seems more likely that we could see confidence fall in further. As things stand, we remain well above the post financial crisis levels we saw in February 2009, despite double the unemployment rate. That seems rather perverse.
EUR/USD – found resistance last week at the 200-day MA, before slipping back. The 1.0770/80 level remains a key support level. A break above 1.1035 is needed to argue for further gains towards the upside and the 1.1200 area.
GBP/USD – found support last week at the 1.2075 area but needs to push back above the 1.2250 area to stabilise and head back towards the 1.2400 area. While below the 1.2250 area the pound remains vulnerable to a move down to the 1.1980 area.
EUR/GBP – broke out of the downside resistance at the 0.8870 area earlier this month before hitting selling interest at the 0.9000 area. The 0.8870 area now becomes a key support, and needs to hold if we are to see further gains. Below 0.8870 targets the 0.8820 area.
USD/JPY – has slowly edged higher over the past week or so but needs to move up through the 200-day MA at 108.30 to target a move back to the 109.70 area. Currently has support at the 107.30 area.