It looks set to be another decent month for markets in Europe, with the DAX set to close higher for the third month in a row, and while it won’t be enough to reverse the losses that we saw in Q1, the rebound that we’ve seen in Q2 is still quite remarkable when looked through the prism of where we were at the end of March, when all of the government lockdowns were only just beginning.
The FTSE100 while also looking to finish higher for the third month in a row, has been the serial underperformer of the bunch, lagging well behind, when compared to the steep falls seen in Q1.
US markets have also seen a similarly remarkable rebound, particularly when you look at the economic landscape now, and where we were heading into the crisis, although the S&P500 hasn’t really moved much from where we finished at the end of May.
Last night’s rebound in US markets, came about despite a warning from the WHO that the epidemic was running out of control and a continued rise in infection rates across a number of US states. There was also some concerns about second waves in China and South Korea, however these infection spikes came from a fairly low base.
The recovery in sentiment was also helped by a 44.3% rise in pending home sales in May, however the wider story would appear to be that investors may be making the calculation that politicians won’t stop the ongoing moves to reopen economies around the world, despite rising infection rates, banking on perhaps, that it is the least worst option.
It is this calculation that appears to be driving risk appetite, along with the fact that while the infection rate is rising the fatality rate is not, and it is that, more than anything, is probably the most important statistic. The reality is that Covid-19 is here for the foreseeable future and while an increase in infections is not particularly desirable, as long as it doesn’t translate into a higher fatality rate then the worst that can happen is likely to be localised lockdowns.
This appears to be playing out here in the UK with the city of Leicester set to be excluded from the grand re-opening on the 4th July, with non-essential shops to close from today, over concerns about a big rise in infection rates there. Chancellor Rishi Sunak will then follow that up with a budget statement next week.
Prime Minister Boris Johnson will also be making a speech later today, where he will outline a £5bn accelerated infrastructure spending plan, with a more detailed “new deal” plan to be published in the autumn.
As we look towards today’s European open, we look set to take our cues from last night’s positive US finish, even if the sentiment took a brief knock after the US Commerce Secretary Wilbur Ross announced that Hong Kong’s special trading status was set to be revoked, thus putting the territory on the same setting as China, in terms of being subject to all of the same tariffs and trade restrictions. This action was a pre-emptive response to this morning’s passing of the new China security law, which the US says poses risks to US sensitive technology.
This appears to have been widely expected with Asia markets finishing the month higher on the back of this morning’s latest China manufacturing and non-manufacturing PMI’s for June which showed another fairly decent month of economic activity, following on from decent readings in May.
The manufacturing number came in at 50.9, while non-manufacturing showed an expansion of 54.4, both above the readings from May.
We’ll also be getting the final Q1 GDP numbers for the UK economy, which aren’t expected to change much from the previous readings, and could even be adjusted slightly lower.
These numbers are unlikely to tell us anything new about the UK economy’s performance at the beginning of the year. The economy was slowing even before the March lockdown, largely due to widespread flooding in February, which not only hit consumer spending, but also the wider economy in general.
On a quarterly basis, the economy is expected to contract by -2%, and on an annual basis by -1.6%. The lockdowns that started across Europe in March are expected to result in big declines in both imports and exports, which are expected to see even bigger falls than the previous readings, with falls of -12.2% and -9.4% respectively.
Concerns about deflation in the euro area are likely to take centre stage later this morning with the latest flash estimate of CPI for June. This is expected to come in at 0.2%, with core prices set to slow further to 0.8%, down from 0.9% in May.
EURUSD – found support at the 1.1160/70 area last week, before rebounding back towards the 1.1350 area. Rebound continue to look shallow with a break below 1.1160 potentially opening up a return to the 1.1020 area and the 50, and 200-day MA’s. Above the 1.1350 area retargets the highs from June at 1.1425.
GBPUSD – continues to drift lower with the next support at 1.2215, with a break below here targeting a move back to the May lows at 1.2075. We need to see recovery back above the 1.2450 level to stabilise and open up the 1.2540 level and last week’s high.
EURGBP – while above the 0.9000 area the bias remains for a move back to the 0.9240 area, if we hold above 0.9020. Trend line support from the lows this year comes in at the 0.8950 area.
USDJPY – currently below the 108.00 area, however a break higher has the potential to see a move towards the 108.70 area. While below 108.00 the risk is for a move back towards the 107.20 area.