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Trump mulls $1 trillion infrastructure package, Europe called higher

Trump mulls $1 trillion infrastructure package, Europe called higher

Stock markets in Europe started off on a very negative note yesterday as fears about rising cases of Covid-19 hit sentiment. 

Traders had reason to be jittery as markets were rocked last Thursday by a rise in the number of new coronavirus cases in the US. Things got progressively worse over the weekend as more US states confirmed that infections increased. In addition to that, there was a jump in the number of cases in Japan, and Beijing underwent a partial lockdown because of an increase in cases, believed to be linked to a food market.

As the European session went on, stocks managed to pull back some of the ground they had lost. US equities opened lower, and by the time trading got underway in New York, European indices were still in the red, but they were off the lows of the session.

It was only one week ago that the major indices of Europe and the US were at multi-month highs. In recent months, governments have been unwinding their lockdown policies, which in turn have helped their economies come out of hibernation. The latest batch of services and manufacturing PMI reports showed there were big improvements in activity levels between April and May. Equities enjoyed a rally until early June due to optimism surrounding the easing of the lockdowns. But now the situation has changed a little as the reopening of economies has triggered a rise in the number of new Covid-19 cases. Governments will have to get used to the idea that a rise in the infection rate is going to be a by-product of lifting certain restrictions.

Yesterday, the New York Fed manufacturing report was posted and even though the reading was poor, it managed to have a huge recovery in the past few months. The reading for June was -0.2, which was a big jump from the -48.5 registered in May. The April reading was -78.2, the lowest on record, so there has been a remarkable bounceback in activity.

By the end of the European session, stocks were only modestly lower. After a few hours of trading, the US indices had managed to erase their earlier losses and turn positive. The Federal Reserve helped sentiment even further by announcing plans to buy individual corporate bonds. Keep in mind the US central bank was already purchasing bond exchange traded funds (ETFs). Purchases of corporate bonds will be made on the secondary market.

The extra stimulus was welcomed by traders as it was less than one week ago the Fed warned the US economy would contract by 6.5% this year. Recently, the Fed tweaked the criteria for the Main Street Lending Programme so it can issue more loans, and registrations for loans began yesterday.

The commitment by the Fed to throw money at the problem continues to boost sentiment. The S&P 500 gained over 0.8%, while the NASDAQ 100 finished up over 1%.

It was reported the Trump administration is considering spending an extra $1 trillion on infrastructure projects as a way to stimulate the economy. US index futures have rallied on the news and European equity markets are anticipated to open higher too.

Stocks in Asia are up as the Bank of Japan kept monetary policy on hold, meeting forecasts. It was announced that 110 trillion yen will be marked out for a special lending scheme to assist struggling firms. Keep in mind it was originally estimated to be worth 75 trillion yen.

The US dollar lost ground yesterday as dealers dumped the greenback as they didn’t want to hold currency that is considered to be a safe haven. In the past few months, the dollar fell as stocks rallied, and the greenback typically did well when dealers were in risk off-mode. The greenback fell yesterday as the sentiment in stocks turned around, which helped GBP/USD and EUR/USD.

Gold ended the session slightly lower, but it was given assistance in the last few hours of trading when the US dollar started to slide. The asset hasn’t been particularly volatile recently, but it remains in its wider bullish trend.  

At 7am (UK time) the UK claimant count for May will be posted, and economists are expecting a reading of 400,000, which would be a drop off from the 856,500 in April. The unemployment rate is tipped to be 4.7%, which would be a jump from the 3.9% registered in March. Average earnings excluding bonuses in April are anticipated to come in at 1.9%. Keep in mind the March level was 2.7%.

At the same time, the final reading of German CPI will be posted and dealers are expecting it to be 0.5%.

The German ZEW economic sentiment report will be announced at 10am (UK time). The consensus estimate is 60, and that would be an increase on the 51 posted in May.

The US retail sales report will be posted at 1.30pm (UK time). The headline reading is tipped to be 8%, and that would be in stark contrast to the -16.4% posted in April. The report that strips out auto sales is predicted to be 5.4% and keep in mind the previous reading was -17.2%.

Jerome Powell, the head of the Fed, will testify before the Senate Banking Committee from 3pm (UK time).       

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, and a move through that area, could see it target 1.1022. 

GBP/USD – Thursday’s daily candle has the potential to be a bearish reversal and it might target 1.2419, the 50-day moving average. A move higher could run into resistance at 1.2682, the 200-day moving average.   

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 0.8839, the 50-day moving average.  

USD/JPY – has been driving lower in the past few sessions and support could come into play at 106.00. A rebound might run into resistance at 108.42, the 200-day moving average. 


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