It was a panful day for equities yesterday as traders started to contemplate the potential economic fallout of the pandemic.
On Tuesday both the IMF and the OBR released awful forecasts, and yesterday dealers took heed of the updates. According to the IMF, the world economy might suffer its worst recession since the 1930s. In January, the organisation predicted the world economy would grow by 3.3% in 2020, while now it has predicted a contraction of 3%. The OBR warned the British economy might shrink by 35% in the second quarter.
The horrendous predictions from Tuesday played on traders’ minds yesterday. In Europe, the FTSE 100, the DAX and the CAC 40 all lost over 3%, while the FTSEMIB dropped nearly 4.8%. The souring of sentiment comes at a time when some European countries are taking baby steps towards easing the restrictions. A tiny percentage of businesses in Italy, Spain and Austria have reopened, and it is possible that some might reopen in Germany as early as next week. Even though the actions are positive, they failed to stem the selling pressure. In recent weeks dealers have been preoccupied with rescue packages and health stats, but now it seems they are bracing themselves for a rough economic ride ahead of them.
US equity markets endured heavy losses too. The latest batch of economic reports highlighted the impact of the Covid-19 crisis. The retail sales report and the industrial output updates fell by 8.7% and 5.4% respectively – the readings were for last month. The New York Fed manufacturing for April came in at -78.2, a record low. As depressing as the economic indicators are, it feels like this is only the beginning of a painful few months ahead of us.
The Beige book painted the US economy in an extremely negative light. Employment fell in all districts. The leisure, hospitality and non-essential retail sectors were the hardest hit. All districts reported very uncertain outlooks.
Late last night, President Trump said the data suggests the US is past the peak of new cases. The US leader is expected to make an announcement regarding the lockdown tomorrow.
Overnight, equities in the Far East lost ground. Chang Yong Rhee, the head of the IMF’s Asia and Pacific department, warned that growth in Asia this year will be 0% - which would be the worst in nearly 60 years. The Australian unemployment rare ticked up to 5.2%, undershooting the 5.5% consensus estimate. The report only covered up until mid-March, before the lockdowns were imposed, so next month’s report should show the impact of the health crisis.
The negative sentiment in stocks was echoed in the oil market. The energy witnessed intense selling pressure yesterday after the International Energy Agency warned there isn’t a workable production agreement available to counteract the future fall in demand. Should that be the case, the oil producers will just have to grin and bear it. If the IMF and the OBR are correct in the predictions, demand for oil is likely to fall off a cliff. The Energy Information Administration report showed that US oil and gasoline stockpiles were 19.2 million barrels and 4.91 million barrels. The high level of inventories point to a major fall in demand.
Traders were in risk-off mode yesterday, so there was selling across the broad. Copper, silver, platinum and palladium all suffered. Even gold, which usually does well when dealers are dumping stocks, fell yesterday. Then again, the rebound in the US dollar played a role in gold’s decline. It is also worth noting, the metal hit its highest level in over seven years on Tuesday, so a pullback wasn’t a surprise.
The Bank of Canada (BoC) left rates on hold at 0.25%, meeting dealers’ forecasts. Stephen Poloz, the head of the BoC, said it was ‘misleading’ to compare this situation to other economic slumps. The central banker warned the Canadian economy is experiencing a ‘significant and rapid’ contraction. The Canadian dollar took a tumble yesterday, and the fall in oil was a large factor in the negative move.
At 7am (UK time), the final reading of German CPI for March will be posted and the reading is tipped to be 1.3%.
The Bank of England credit conditions survey will be announced at 9.30am (UK time).
The US will publish a number of economic indicators at 1.30pm (UK time). The jobless claims reading will be closely watched, and the reading is tipped to be 5.1 million. Building permits and housing starts for last month are both tipped to be 1.3 million.
EUR/USD – while it holds below the 100-day moving average at 1.1028, 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 1.1028 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 0.8612 – 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.