News

Europe set to open higher on fiscal response hopes

US markets posted their worst one day fall since 1987 yesterday, with the Dow down over 3,000 points at one stage as investors continued to take fright as fears grew, that in the absence of a fiscal response, the global economy could well be heading for a sudden stop.

Central banks have done their best, but in the absence of significant fiscal measures from politicians across the world, it is difficult to see where markets might find a possible base in the medium term.

Yesterday’s G7 statement to do “whatever is necessary” to stabilise the global economy may well have worked a few years ago, but with the benefit of hindsight and years of procrastination markets have decided that such talk is on the cheap side.

After years of over promising and under delivering, investors have little confidence that the G7 is united enough to provide a coherent fiscal bazooka. If the G7, IMF and other governing bodies want to look to stabilise financial markets they will need to walk the walk, as talking the talk appears to be no longer cutting it.

Despite this we have seen signs of some stabilisation in Asia markets on reports that US politicians are one step closer to formulating a significant fiscal plan to help cushion the US economy.  

Hopes that President Trump might follow up Sunday nights Fed actions with a fiscal volley of his own were soon dashed when he merely warned that the economic disruption from the virus could last well into the summer.

Coming on top of airlines grounding their fleets and scrapping most of their schedules for the foreseeable future, car plants closing down their production facilities, while governments have started to close borders and impose further restrictions on the movements of their populations, and there appears little sign of an end to the current uncertainty.

The hard data is also now starting to make itself felt, with the latest US Empire Manufacturing index for March collapsing to its worst level since March 2009, at -21.5, after yesterday’s shocking China data.

In further coronavirus developments France has banned all non-essential outings on pain of punishment for two weeks, while also pledging that no company whatever its size would go bankrupt, pledging billions of euros to support the French economy. Here in the UK the government has urged people to avoid pubs, theatres and restaurants, as well as trying to work from home where possible, especially in London which appears to be at the epicentre of the outbreak.

Last night’s big falls on Wall Street have prompted some speculation that they could provide the nudge to politicians to get their acts together on the fiscal side with the result we have seen a modest rebound after yesterday’s falls. As such markets here in Europe look set to see a similarly modest open, with all eyes on today’s EU leaders conference call where they are expected to discuss possible virus responses.

Reports out of Brussels have suggested that EU finance  ministers agreed coordinated fiscal measures worth 1% of GDP to fight the crisis, according to an EU official. This is unlikely to be enough. 

UK Chancellor of the Exchequer Rishi Sunak is also expected flesh out further the details from last week’s budget with respect to helping small businesses and individuals who will be hit hard by the various restrictions being placed on peoples movement by the new government measures.

After last week’s 50bp emergency rate cut from the Bank of England, this could well be the high-water mark for unemployment and wages numbers here in the UK, as the ripple effect of COVID-19 heads our way and infects global markets. Thus far we’ve seen little sign of economic weakness in the wage’s numbers or the unemployment numbers for that matter.

This is to be welcomed at a time when wage growth has continued to be resilient at over 3%, and unemployment is still close to 40-year lows. Consumers do appear to have cut back as evidenced by a slowdown in retail sales, but even here we’ve started to see a modest rebound after a weak end to 2019.

Today’s numbers look set to show that the UK economy has stayed resilient, however they do have a significant lag and won’t reflect recent events around the recent flooding, as well as the outbreaks of coronavirus, which has seen consumer footfall fall off a cliff.

If yesterday’s China retail sales for February are any sort of guide then the economy here in the UK, as well as across Europe, and the US is about to hit the buffers hard, toilet roll sales notwithstanding, as new COVID-19 cases continue to rise.  

EURUSD – the current rebound is struggling neat the 1.1230 level and while below here the risk is for a move back towards the 50-day MA at 1.1050. A move through here has the potential to retarget the recent lows at 1.0780. Rebounds need to overcome the 1.1240 level to retarget the recent highs above the 1.1400 level.

GBPUSD – remains under pressure but has so far managed to hold above the 1.2200 area. A break below 1.2200 has the potential to open up the recent lows at 1.1960. The declines from last weeks high at 1.3150 has been precipitous and we need to see a rebound back above 1.2550 to stabilise.

EURGBP – has continued to head higher with the 0.9200 area within touching distance. A move through the 0.9200 area targets the previous peaks at 0.9325. A fall back below the 0.8980 area could well see these gains unwind quickly.

USDJPY – last week’s big move in the US dollar saw a big rebound from three-year lows, however this could well be short lived. We need to see a move above the 200-day MA to argue for further gains, or risk a slide back to the lows. The 108.50 level and 109.20 levels are big resistance levels.

CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination