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Mood relatively optimistic despite health woes

CMC Markets

Stock markets in Europe and the US traded higher yesterday thanks to comments from President Trump that the US-China trade deal is still intact. 

The US leader had to clarify that trading relations with China remain on solid ground, following the remarks from Peter Navarro – a trade advisor to the Trump administration. Mr Navarro, who is a well-known hawk when it comes to China, claimed that phase one of the US-China trade deal was ‘over’. The trade advisor claimed the comment was taken out of context, but the Donald set the record straight. The result was that stocks and commodities pushed higher.

The loosening of lockdown restrictions has helped economies recover from their respective self-induced comas. The flash readings of French, German, British and US manufacturing and services PMI reports all showed rebounds in activity from the previous readings. The updates from France stood out the most as the services and manufacturing readings were 52.1 and 50.3 respectively – there was positive growth in the industries. It is worth remembering they are flash readings so they might be revised. In the west, the lockdowns were introduced in March, so April was the first full month of being on lockdown. The French manufacturing and services PMI readings in April were 31.5 and 10.4 respectively, so in light of the news from yesterday, the rebounds have been remarkable. 

A recovery in economic activity comes at a cost, and that is why there have been increases in Covid-19 cases in several countries, such as China, Germany, India, Brazil and the US. Yesterday it was announced that a region in Germany will re-enter lockdown after more than 1,500 workers at a meat packing plant tested positive for Covid-19. At the back end of last week, Apple announced its intention to re-close stores in the US states that have seen a jump in the infection rate.

Dr Anthony Fauci, a medical expert to the Trump administration, warned there was a ‘disturbing’ rise in the number of new coronavirus cases in certain US states, but the expert also said that an ‘absolute lockdown’ might not be required.

Despite the ongoing concerns in relation to the health crisis, equity markets in Asia are a touch higher and European indices are tipped to open slightly lower.  

After much speculation, it was confirmed by Prime Minister Johnson yesterday that some lockdown restrictions in England will be eased on 4 July. In addition to that, the social distancing guidelines will be relaxed too. The change in lockdown rules will see the re-opening of pubs, restaurants, galleries, and cinemas. This will be another step towards returning to normality. To a lesser extent that helped the sentiment in equity markets too.  

Lately, the US dollar has been a popular safe-haven trade, so conversely the greenback has lost ground when dealers were keen to take on more risk, which prompted its negative move yesterday.    

The weakness in the US dollar helped gold hit its highest level since October 2012. Historically the metal has rallied when stocks have sold off as funds typically flowed towards assets that are deemed to be lower risk. The rise of the US dollar as a risk-off play has distorted the old relationship between gold and attitudes towards risk. Recently we have seen gold and stocks move higher in tandem.

The German IFO business sentiment reading for June will be posted at 9am (UK time) and economists are expecting a reading of 85, which would be an improvement on the 79.5 posted in May.

The EIA report will be in focus today as WTI and Brent crude hit three-month highs yesterday. US oil inventories are tipped to increase by 850,000 barrels, while US gasoline stockpiles are anticipated to fall by 1.2 million barrels. The data will be posted at 3.30pm (UK time).

EUR/USD – since early May it has been in an uptrend, but it has undergone a pullback recently. If it breaks below the 1.1168 zone, it could retest 1.1029, the 200-day moving average. Should the wider uptrend continue it might target 1.1495. 

GBP/USD – Monday’s daily candle has the potential to be a bullish reversal and if it moves higher from here it might target 1.2685, the 200-day moving average. A break below 1.2335 could pave the way for 1.2163 to be tested.   

EUR/GBP – has been in an uptrend for over one month and if it retakes 0.9054, it might target 0.9239. A move lower might find support at 0.8868, the 50-day moving average.  

USD/JPY – has been driving lower for over two weeks and support could come into play at 106.00. A rebound might run into resistance at 108.40, the 200-day moving average. 

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