European and US stock markets underwent another choppy session yesterday, bobbing around on the ebb and flow of awful economic data, and optimism that the slow easing of lockdowns will prompt and upturn and ignite a quickish recovery.

This market schizophrenia, along with some weakness in oil prices, prompted stock markets in Europe to slip back again, while US markets also struggled to maintain their early gains, slipping lower into the close.

Against this backdrop Asia markets have struggled for direction with a mixed session and this lack of direction is expected to translate into a slightly firmer open here in Europe after yesterday’s losses.

This morning’s latest China trade numbers for April showed little evidence of a recovery in economic activity despite the lifting of lockdown back at the beginning of March. Exports were better than expected rising 3.5%, probably helped by the shipping of medical products like PPE as the rest of the world wrestled with the virus while in various states of lockdown. In worrying signs that internal demand remains weak imports slid much more than expected, falling sharply, by 14.2%, suggesting that while the economy was reopening activity was far from normal, with consumers behaving more cautiously.

The lack of any signs of a significant rebound in China along with yesterday’s ghastly ADP employment report which saw over 20m people lose their jobs in April, is slowly bringing it home to markets the terrible economic toll the coronavirus pandemic is set to inflict on the US economy, as well as the global economy more broadly.

In Europe, Italy, Spain and Greece look set to pay a terrible price in terms of their economies after the latest services PMI numbers showed new record lows in economic activity. Given how much tourism makes up the bulk of economic activity, and the parlous state of the public finances in the region, the risk of an economic depression remains a real possibility.

This fear prompted the EU Commission to state that the survival of the euro area was a real concern to them, as they predicted a 9% contraction for all three southern European countries, in the absence of a co-ordinated rescue plan. With the actions of the European Central Bank in the cross hairs of the German court it is therefore in the hands of the politicians to attempt to correct the flaws inherent in the European project that were there from the very beginning.

While it is clear that the economic data for the most part can’t get much worse, doubts are creeping in with respect to the ability of the various economies from across Europe to bounce back quickly, and this appears to be manifesting itself into increasing caution about the resilience of the current market rebound.

Yesterday the latest German factory orders data for March saw a slump of 15.6%. This doesn’t bode well for today’s industrial production data, as well as next week’s German Q1 GDP numbers The expectation is for a 7.4% decline in industrial production.

Today’s industrial and manufacturing production data for March from France could well prompt further downgrades to the recent 5.8% Q1 GDP contraction of the French economy. Industrial production is expected to decline 13.4%, with manufacturing expected to see a 16% monthly fall.

Today’s US weekly jobless claims look set to pile on the misery, with another 3m claims bringing the total claims in the last few weeks close to the 30m mark, ahead of an April jobs report tomorrow which is expected to see another number in excess of 20m US jobs lost, and an unemployment rate to rise above 15%, well above the peak seen in the aftermath of the financial crisis.  

The Bank of England is set to announces its latest monetary policy decision in the next hour or so, and new governor Andrew Bailey in his first meeting flying solo has certainly been thrown in at the deep end.

With interest rates already at record lows of 0.1%, the only way the central bank can effectively ease further is to widen the amount and scope of its bond buying program. It has already been indicated that the bank will use its “Ways and Means” account to help support the UK economy and ersatz the Government response to the current economic crisis.

Today’s inflation report and virtual press conference at 10am, is likely to paint a dark outlook for the UK economy, not only for this year, but also for the next few years as rising unemployment triggers a tsunami of defaults and bankruptcies. The growth forecasts are likely to be moved into line with assessments from the likes of the OECD and the IMF, which suggests we could see a figure in the region of -7.5%. It was notable that Andrew Bailey didn’t demur too much when a figure of -12% was put to him recently, however this was put to him within a range of -5% to -12%.   

With Brexit also a clear and present threat to both the UK and other European economies, the road ahead looks an extremely bumpy and pot holed one, and as any driver will tell you, a road full of potholes will prevent you from picking up any sort of acceleration to a steady cruising speed. This would suggest that, as far as bond buying and other asset purchases are concerned, the Bank of England is far from done.

This could manifest itself by the bank committing to do more or we could see any dovishness manifest itself with a commitment to extend the limits of its bond buying program beyond July.  

EURUSD – finding support at the 1.0780 area but still looks heavy with the April lows at 1.0725, the next key support. 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 – the break below 1.2400 opens up the risk of a move towards the recent lows at 1.2245. appears to be running out of steam but needs to break below the 1.2400 area to signal further declines. 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 – has continued to find support above the 0.8670/80 area which remains a key barrier to further losses. While it holds the potential for further a rebound to the highs this week at 0.8820. Only below 0.8670 argues for a return to the 0.8620 level.

USDJPY – continues to look soft sinking below the 106.20 area and the lows last week. As such we look set for further losses towards 105.20 initially, and towards the lows in March. We need to see a recovery above 107.50 to stabilise.

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