Having got off on the wrong foot on Monday, markets in Europe enjoyed a bit of a Tuesday rebound, as the prospect of more lockdown restrictions being lifted, alongside another decent day for oil prices saw some of Monday’s losses reversed. Oil prices in particular have undergone a decent recovery, putting in their best performance since last July, rising for five days in a row.
This optimism that there won’t be a second peak, as restrictions are lifted currently saw some optimism creep back yesterday, however there still seems to be a widespread underestimation of the fact that any new normal, is likely to fall well short of the old normal.
For now, markets appear to be pricing in the prospect that economic activity can improve from here on in, and while that may well be true, we still don’t know the extent of the economic damage that has been done already. This is important given that some of the damage could well be very difficult to repair and bounce back from, meaning that instead of a “V” or “U” shaped recovery we could well see more of a gradual, and very long “U”.
This means there is a real risk that markets may well be underestimating the longer-term consequences of the changes that are taking place, and looking past the continued dire data. Jobs are still being lost with further announcements yesterday, as Virgin Atlantic and AirBnB became the latest in a lengthening list of companies that has come to the realisation that social distancing, aircraft and travel aren’t compatible bedfellows, at this time, or in the near future.
This may help explain why US markets, while having a decent day yesterday closed off their highs, and this lack of follow through, looks set to push European markets lower on the open.
Yesterday’s UK services PMI for April, which came in at a record low of 13.4 was the warm up act for today’s numbers from Spain, Italy, France and Germany, which are also set to come in at record lows, somewhere in the low teens, and potentially even lower, in the case of Spain and Italy.
The pain will be most pressingly acute in Spain and Italy who will have seen their tourist industry completely wiped out this year, as their potential customers stay away, due to either being in lockdown, or losing their jobs. This will be a hammer blow to both countries which have suffered greatly over the last ten years as a result of European debt crisis, and who rely on tourism for billions of euros of income.
Today’s services PMI for Spain is expected to show a fall from 23 to 10, while Italy is expected to fall to a scarcely believable record low of 9. France and Germany’s numbers are expected to stay close to their flash readings of a couple of weeks ago of 10.4 and 15.9.
German factory orders for March are expected to see a drop of 10%, while retail sales in the Eurozone for the same month are expected to show a fall from 0.9% to -10.6%, which in turn could well see last week’s EU Q1 GDP estimate of a 3.8% contraction, revised lower in the coming weeks, in line with the big contractions we’ve seen in France, Italy and Spain.
Against this backdrop of such weak economic activity the last things investors will want to contend with is a European Central Bank that could find itself constrained by yesterday’s ruling by the German Constitutional Court that they make sure that their asset purchase programs, current, as well as potentially future conform to EU law.
This feeling on the part of the ECB of potentially having to look over their shoulders could act as a significant constraint in terms of speed of action when it comes implementing monetary policy. The resultant sell-off in Italian bonds spoke to this concern as the spread between German and Italian 10-year yields widened and the euro fell back.
In the US yesterday’s ISM non-manufacturing report for April was almost impressive when compared to the numbers we’re about to see later today from Europe’s services sector, coming in as it did at 41.8. even the weaker components still came in above 30, with employment falling from 47 to 30, while new orders plunged from 52.9 to 32.9 both of which were record lows.
What can’t be sugar coated however is the effect that the coronavirus has had on the US labour market and we’ll get a flavour of that later today with the ADP employment report for April, which is the warm up act for the Friday horror show that will be the April non-farm payrolls report.
In March the ADP report saw a decline of 27k jobs, however today’s April report is expected to come in much higher level with estimates of 21m job losses.
EURUSD – sank back towards the 1.0810 area with a break potentially opening up a move back to the April lows at 1.0725. The highs two weeks ago, and the 200-day MA at 1.1035 are a key barrier to further upside. This remains the next barrier for a move towards 1.1200.
GBPUSD – appears to be running out of steam but needs to break below the 1.2400 area to signal further declines. A move below 1.2380 could well see a return to the recent lows at 1.2245. We need to see a move back above the 1.2500 area to signal a retest of the 200-day MA and April highs at 1.2645.
EURGBP – we look set for another retest of the 0.8670/80 area which remains a key support level. While it holds the potential for further gains remains. Only below 0.8670 argues for a return to the 0.8620 level.
USDJPY – the weakness in the US dollar here could see a retest of the 106.20 area and the lows last week. While it holds the potential for a rebound to 107.50 remains, however a break lower could see a move towards 105.20.