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Europe set for modest rebound, Fed in focus

CMC Markets

Stock markets in Europe endured large losses yesterday as dealers took heed from the World Bank, who on Monday warned the global economy might contract by 5.2% this year. 

If the international organisation is correct, it would be the largest economic contraction since the 1940s. In recent weeks, traders have been largely immune to the dreadful economic announcements that have been posted, as well as the dire forecasts that have been issued. It would appear the warning from the World Bank resonated with traders. The declines seen on Wall Street weren’t as bad as those registered on this side of the Atlantic.

The US tech sector is in a league of its own as the NASDAQ 100 closed up over 0.6%. At one point the benchmark traded above the 10,000 mark for the first time. While traditional industries are struggling on account of the Covid-19 crisis, the tech sector is cleaning up as it is open for business. Technology was already becoming a larger part of our everyday life before the pandemic, but now the embrace of tech has been sped up out of necessity.

The declines that were seen in most major western stock markets yesterday could well be pullbacks before the next leg higher. In the past couple of months, government have been easing up on lockdown rules. Should that trend continue, it is likely we will see a rise in economic activity as businesses start to reopen.

Overnight, China posted the latest CPI and PPI numbers. The CPI reading was 2.4%, while economists were expecting 2.7%, and keep in mind the April reading was 3.3%. The PPI level was -3.7%, and the consensus estimate was -3.3%. The previous update was -3.1%. It is clear that demand is weakening given the fall in the CPI and PPI readings. Sentiment is mixed in Asian stock markets, while European benchmarks are expected to recoup some of yesterday’s losses.

Lately we have seen similar moves in indices and oil, as both have been lifted by the prospect of economies reopening. Oil lost ground yesterday too, as the update from the World Bank dampened the energy market. If the global economy is set to suffer its deepest recession since the second world war, oil’s demand is likely to tank. It is worth noting that WTI and Brent crude hit their highest levels in roughly three months on Friday, so the market was due a pullback.

Metals were mixed yesterday as platinum and palladium moved lower, while copper set a new three-month high. Gold pushed up too but that was down to a flight to quality play.   

Currencies have seen lower volatility than stocks recently. The US dollar continues to be weak, and it has fallen to its lowest level in nearly three months. If the much better than expected US jobs report couldn’t spark a rebound in the greenback, what will? Seeing as traders were in risk-off mode yesterday, it was hardly surprising the yen performed well. AUD/USD tumbled yesterday due to rising Australia-China political tensions.   

At 7.45am (UK time) the French industrial production report will be posted and the reading is tipped to be -20%.

Headline CPI in the US is anticipated to fall from 0.3% in April to 0.2% in May. The core reading is forecasted to be 1.3%, which would be a dip from the 1.4% registered in April. The reports will be revealed at 1.30pm (UK time).

The EIA report will be posted at 3.30pm (UK time). Oil and gasoline inventories are expected to fall by 1.9 million barrels and 500,000 barrels respectively. Should energy stockpiles tumble, it could be a sign that demand is rising.

The Federal Reserve will announce its interest rate decision at 7pm (UK time) and dealers are expecting rates to be left on hold. The press conference will follow 30 minutes later, and Jerome Powell, the head of the Fed, is likely to reiterate the point they are willing to do what it takes to support the US economy. Traders will be listening out for economic projections, and there is talk of yield curve control too.  

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. 

GBP/USD – is in an uptrend and it is now above the 200-day moving average at 1.2673. A further rally might run into resistance at 1.3000. A break below 1.2673 might find support at 1.2394, the 50-day moving average.   

EUR/GBP – has been in an uptrend for one month and if it retakes 0.9054, it might target 0.9239. A move lower might find support at 0.8826, the 50-day moving average.  

USD/JPY – Monday’s daily candle has the potential to be a bearish reversal, and a break below the 200-day moving average at 108.39 might pave the way for 107.08 to be tested. If the recent high of 109.85 is retaken, it should put 111.71 on the radar.  

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