29-5-2020 10:32:47Stock markets in Europe and the US endured heavy losses yesterday on account of renewed health fears. 

In the early days of the coronavirus crisis, President Trump played down the severity of the situation, but he has since changed his tune. Yesterday, the US president declared the country is in for a ‘very, very painful two weeks’. The comments hit sentiment, leading to the major indices in Europe losing more than 3%, and the big equity benchmarks in the US in excess of 4%.

The sell-off was felt across most commodities too as silver, palladium, platinum and oil all lost ground. Gold drove higher yesterday as the metal benefitted slightly from the flight to quality play. The CMC JPY index was the outperformer in the forex indices. The tumble in stocks, oil and industrial metals, combined with a move higher in gold and the yen painted a picture of a textbook risk-off session.

Trading in Asia has been mixed as dealers remain cautious about the health crisis. Stocks in mainland China are slightly up, while equities in Japan and Hong Kong are offside. The US index futures have rebounded a little, but European equity markets are poised to open a little lower.

The oil market has been under pressure recently from demand worries, but also from the price war between Saudi Arabia and Russia. The Saudis are gearing up to boost output as the Kingdom is keen to drive down the energy market as a way of getting back at Russia for not agreeing to output cuts at the latest OPEC+ meeting. There is talk that Mr Trump will get involved in the situation in an effort to put a floor under the price – the US president is conscious the shale sector is under enormous pressure on account of low prices. Yesterday, US oil stockpiles came in at 13.8 million barrels, which greatly exceeded the 3.7 million barrels forecast. Gasoline inventories jumped to 7.5 million barrels. The reports point to a decline in economic activity, brought on by the disruption caused by pandemic.  

Last week we saw a lot of money being thrown at the pandemic as central banks and governments took drastic measures to cushion the blow to their respective economies, but now dealers must contend with the growing health crisis.

Covid-19 has claimed more lives in the US than it has in China. Europe is grappling with the health emergency too as Italy and Spain have been hit hard by Covid-19 in terms of cases. Italy will now keep its lockdown in place until 13 April, while Germany has extended its lockdown until 19 April – this points to more financial pain on the horizon.

The European manufacturing sector is suffering on account of the health emergency. Yesterday the major European economies released the final readings of their manufacturing PMI reports. The Spanish reading came in at 45.7, which was a big drop from the flash reading of 50.4. It was a similar situation in Italy, whereby the flash update was 48.7, but the final metric was 40.3. The big revisions lower underline the slide in activity. The UK report was the best of a bad bunch as the final level was 47.8, the consensus estimate was 47, while the flash reading was 48. It is worth noting the manufacturing industry is a relatively small portion of the British economy.

On the face of it, the US ADP employment report wasn’t too bad all things considered. In March, 27,000 jobs were lost, while economists were anticipating 150,000 jobs to have been lost. The devil is in the detail, and it is worth noting the report covers ups until 12 March – so much of the economic disruption was missed in the update. The finer details of the announcement showed that medium and larger companies added a total of 63,000 jobs, while small firms lost 90,000 jobs. When a downturn hits, smaller companies tend to feel the impact first, so this could be a sign of what is to come for the wider jobs market. The US ISM manufacturing reading was 49.1, and that easily topped the 44.5 forecast. The employment component of the update slipped to 43.8 from 46.9 – another sign of weakness in the jobs market.

The US dollar performed well yesterday as it made good headway versus the euro, the Australian dollar, and the Canadian dollar. Its move higher versus the pound was relatively small as sterling was reasonably strong.   

At 7am (UK time) the UK Nationwide house price index report will be posted, and prices are tipped to drop by 0.1% on a monthly basis.

Eurozone PPI is expected to drop from -0.5% to -0.7%. The update will be released at 10am (UK time).

The US jobless claims reading is anticipated to be 3.5 million, and keep in mind last week’s update was 3.28 million. Economists are expecting the US trade deficit to fall to $40 billion from $45.36 billion. The update will be posted at 1.30pm (UK time). US factory orders will be posted at 3pm (UK time) and the consensus estimate is 0.2%.     

EUR/USD – has turned lower recently and while it holds below the 1.1000 mark, the negative move is likely to continue, and further losses might see it target 1.0870. A retaking of 1.1000 might put 1.1147 on the radar.    

GBP/USD – has been driving higher recently and if the bullish move continues it might target the 100-day moving average at 1.2879. Should the currency pair undergo a pullback, it might retest the 1.2000 area.   

EUR/GBP – is in a downtrend and further losses might see it target 0.8758 – 200-day moving average. A break above 0.9000 might send it to the 0.9100 area.         

USD/JPY – has been pushing lower for over one week and while it holds below the 200-day moving average at 108.30, the bearish move should continue. Support might be found at the 106.00 area. A push higher from here could see it retest the 110.00 zone. 

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