US markets underwent a choppy session yesterday, opening higher on optimism over various parts of the US economy reopening, while also coping with the headwinds of rising tension between the US and China, over the status of Hong Kong.

An afternoon headline from the South China Morning Post that said China was ready to hit back on the US, over any punitive action with regard to Hong Kong, saw stocks slip briefly into negative territory, before rebounding to close higher for the third day in a row, with both the Dow and S&P 500 closing well above the psychologically important 25,000 and 3,000 levels respectively.

In terms of significance both of these events are quite important and suggest the potential for further gains, albeit with the caveats that a US, China flare-up could let some of the air out of the current air of optimism.

As if to highlight the fluidity of the situation, US Secretary of State Mike Pompeo declared that the US no longer considered Hong Kong as autonomous from China, and as such would mean that the region would no longer be subject to the favourable trade relationship currently in place. The removal of this exemption would mean that all of the tariffs currently on Chinese goods, could then be applied to the same trade coming out of Hong Kong. The US house also passed a bill authorising sanctions against senior Chinese officials for human rights abuses against Muslim minorities.  

In Europe, optimism also abounded, helped by an EU Commission proposal that include the raising of €500bn of debt on bond markets, which would be handed out as grants to the worst affected European countries hit by the virus pandemic, with other measures set to include a suite of new taxes and levies on tech companies, and on single use plastics, over the course of the next few years.  

While markets have reacted as if this is a significant moment for Europe, the sums involved are tiny in the overall scheme of things, given the scale of the economic shock, particularly since none of the money will be available immediately. There is also the prospect that the stated sums will probably get watered down, and even if it is delivered will probably be so small as to be completely insignificant.

This is because there is already some push back from the likes of the Netherlands, Austria, Sweden and Denmark, particularly since Sweden isn’t even in the euro. Any agreement of a measure of this type would be another step towards fiscal integration, which is needed if the euro is to succeed, however it also runs the risk of further fuelling populism if countries give up more fiscal control over their own economies, without getting the necessary electoral endorsements from their populations. Further discussions are likely to take place at the next EU summit due on 18 and 19 June.

Against this uncertain backdrop of positivity on the one hand as economies reopen and worries over deteriorating US-China relations, markets in Asia have been mixed with Hong Kong markets sinking, while oil prices have also fallen back. Markets here in Europe look set to once again shrug off the rising tensions between the US and China and open higher on optimism over a continued belief that the upcoming relaxation of restrictions will result in a decent rebound in economic activity as fed up consumers, once released from the limitations of lockdown go out on a spending binge, to make up for weeks of sitting at home.

This does rather assume that consumers feel confident in their ability to sustain the same level of spending as previously, at a time when unemployment is likely to go higher, and the economic outlook remains hugely uncertain. 

On the data front we’ll get to see the latest revision to US Q1 GDP, which came in at -4.8% on its initial release a few weeks ago. This translates into a huge fall when you consider that for most of the quarter the economy was humming along nicely. It was only in the last two weeks of March that the economy found itself going into shutdown, with jobless claims jumping as much as 10m in the last two weeks of the quarter.

Today’s revision could see this number revised even lower. We know retail sales and personal spending slumped sharply in March, which in such a consumer driven economy makes the prospect of further weakness even more likely and notable.

Yesterday’s Fed Beige Book also pointed to further deterioration in economic conditions across all districts, with muted price pressures with the biggest hits in leisure and hospitality sectors. The only silver lining was some evidence of a pickup in New York, with the outlook highly uncertain.   

EUR/USD – the euro pushed above last week’s high, as well as the 200-day MA, hitting a high of 1.1031, but has thus far been unable to move much higher. We need to see a move through 1.1035 to target a potential move towards 1.1200. Interim support comes in at the 1.0870 area.

GBP/USD – unable to push up to the 1.2400 area the pound has slipped back, finding support at the 1.2230 area initially. Continues to look a little heavy with the risk of a move back towards the lows last week at 1.2075, with support below that at 1.1980. A move through 1.2400 reopens the recent highs up near the 1.2650 area.

EUR/GBP – found support this week at the 0.8870 area, and have since rebounded towards the 0.9000 highs we saw last week. The 0.8870 area remains a key support, with a break above 0.9000 targeting a move towards the 0.9080 area.

USD/JPY – trading quietly at the moment below the 108.00 level with the 108.30 a key resistance. A move through 108.30 and the 200-day MA targets the 109.00 area. Currently has support at the 107.30 area.