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Equity sentiment muted after strong US session

It was a stellar session for US stock markets yesterday, as the S&P 500 finished up more than 3%, and the NASDAQ 100 gained 4.3%. 

The bullish sentiment was fuelled by the view that the government is getting a handle on the pandemic. New York is the hardest hit area of the US, and the fatality rate appears to be levelling off. On Monday, Donald Trump claimed there was ‘clear evidence’ that the lockdowns were working. Dealers love to snap up relatively cheap stocks, so even small inclinations that the health crisis is being brought under control provided an excuse for the bulls.

Larry Kudlow, an economic advisor to the Trump administration, said the US president is moving towards making a very important economic announcement in the next day or two about re-opening the economy. It is no secret that Mr Trump is extremely pro-business, but going back to normal too quickly could throw up new problems, such as a spike in the infection rate. Donald Trump suggested that some states could remove their restrictions before the end of April.  One would imagine that resumption of economic activity would be measured, as we have seen in Continental Europe.

Spain and Italy have loosened some of their respective restrictions and certain businesses have been allowed to reopen. From an economic point of view this isn’t big news, but it projects a very positive image. Earlier in the week it was reported that Germany are thinking about easing their restrictions too. Not all countries in the West are looking to soften their stance in the fight against Covid-19 as France has extended its lockdown into the middle of next month, and it’s looking likely that the UK will keep its social distancing policy in place for longer too. Equity markets in Europe were mixed yesterday, as the DAX, the IBEX 35 and the CAC 40 posted gains, while the FTSE 100 and the FTSEMIB finished lower.  

The US leader is not impressed with the way the World Health Organisation are handling the crisis, hence why he said the US government would be pulling its funding for the group.

Overnight, stocks in Asia traded a little lower. The Chinese central bank lowered a medium term lending rate to a record low in a bid to assist the economy.

The health crisis and the perception about how governments are dealing with it took precedence yesterday. The IMF and the UK’s Office for Budget Responsibility both issued brutal economic forecasts. The IMF now feel the global economy will contract by 3% in 2020, and it wasn’t that long ago there were predicting growth of 3.3%. The eurozone is expected to suffer the most as the IMF anticipate the region will endure 7.5% negative growth. The OBR warned the British economy might contract by 35% in the second quarter. The education, accommodation and food services, and construction sectors, are pegged to be the worst impacted. As dire as the predictions were, the announcements failed to dampen market sentiment.

The US dollar lost ground yesterday as the Fed’s Main Street stimulus package from last week weighed on the currency. The greenback fell to its lowest level in over two weeks, and that helped EUR/USD and GBP/USD.

The slide in the dollar helped gold rally to a level last seen in late 2012. The commodity traditionally does well when equity markets tumble, but the positive sentiment in stocks didn’t derail the bullish run in the metal. Palladium and platinum also racked up large gains yesterday too.                 

At 7.45am (UK time) French CPI will be posted and economists are expecting 0.7%. The Italian CPI reading is tipped to be 0.1%, and the announcement will be posted at 9am (UK time).

The US retail sales report for March is expected to be -8%, and keep in mind the February reading was -0.5%. The report that strips out auto sales is expected to be -4.8%. The New York empire state manufacturing report is expected to be -35, which would be a sharp fall from the -21.5 posted in March. The reports will be posted at 1.30pm (UK time). The US industrial production report is anticipated to be -4%, and it will be revealed at 2.15pm (UK time). 

The Bank of Canada (BoC) are tipped to keep rates on hold at 0.25%. The announcement will be posted at 3pm (UK time). The BoC did an emergency rate cut of 0.5% in March, in addition to launching a government bond-buying scheme. The BoC will hold a press conference at 3.30pm (UK time), and traders will be listening out for the guidance.

US energy inventories will be posted at 3.30pm (UK time) and oil stockpiles are expected to be 11.85 million barrels, while gasoline inventories are forecast to be 6.75 million barrels.

The US Beige book is likely to be horrendous as the lockdown is having a terrible impact on the US economy. The report will be posted at 7pm (UK time).

EUR/USD – while it holds below the 100-day moving average at 1.1029, the currency pair could lose further ground. Support might be found at 1.0768, and a break below it might pave the way for 1.0636 to be tested. A move through 1.1029 might put 1.1147 on the radar.   

GBP/USD – has been in an uptrend since late March and resistance might come into play at 1.2650 – 200-day moving average. Beyond that metric, the 1.2800 region might act as resistance too. A move lower from here might see it target 1.2360.     

EUR/GBP – has been pushing lower since mid-March and should the bearish trend continue it might target 0.8610 – the 100-day moving average. A rebound might target 0.8865 or 0.9000.           

USD/JPY – is in a negative trend and further losses from here might see it target 106.91. A move through 106.91 might put 106.00 on the horizon. A move above 109.38 could see it target 110.00.      

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