European markets look set to play catch-up this morning, having missed out on sharp declines in UK and US markets on Friday, with a sharply lower open expected.
Friday’s sharp declines were all the more notable given that European stocks posted their best monthly performance in nearly five years, while the S&P 500 posted its best monthly performance since 1987, helped by reports that Gilead Sciences remdesivir drug had seen positive results on treating coronavirus patients. There had also been rising optimism that the paring back of lockdown measures that are set to begin in several countries over the next few days would be the beginning of the long road back.
Here in the UK there is some hope that the government will start to outline a road map for a course out of lockdown later this week, however any changes are likely to be modest and expected to come in well short of business-as-usual.
In truth it didn’t take much for the positive sentiment that we saw from April begin to unravel at the end of last week. The rally from the March lows had already got a lot of people scratching their heads given how poor recent economic data has already been, with the added concern it is likely to get much worse in the coming weeks.
Having only recently signed a trade deal with China just prior to the outbreak of the current pandemic, President Trump caught the markets a little off guard by comments that raised the prospect of raising new tariffs against them on the premise that the virus was their fault, and that they sought to spread it on purpose, or at the very least did little to halt its spread.
For several weeks now the prospect of significant monetary, as well as fiscal stimulus, has prompted a decent rebound in equity markets, largely on the basis that any policy missteps on the part of politicians might be kept to a minimum. This seems much less likely now, given recent comments, while the sharp deterioration seen in recent March economic data prompted a sharp reassessment of the likelihood of a V-shaped recovery, that had help prompt and fuel a lot of the gains that we’ve seen in the past few weeks.
A number of companies are getting ahead of the upcoming economic shock by announcing large numbers of job losses already, with Boeing, British Airways, Rolls Royce and Ryanair all saying that they would have to cut head count at the end of last week, even as lockdowns start to get relaxed. These job cuts are likely to be only the start, even with furloughs helping to cushion some of the immediate impact.
The extent of the economic impact on the manufacturing sector in April is expected to be confirmed this morning with the release of the final PMI numbers from Spain, Italy, France and Germany. While the economic slide in manufacturing activity has been of an order slightly more manageable than we have seen in services, activity here is still expected to remain weak, particularly since most countries have been in lockdown throughout April. Expectations are for further weakness to 35, 30.3, 31.5 and 34.4 respectively for Spain, Italy, France and Germany.
The European Central Bank survey of professional forecasters is also set to release its latest economic assessments for the euro region, for the current year, as well as longer term, and while there is absolutely little doubt that they will make for sobering reading, they are also likely to be about as much use as a chocolate teapot, in these uncertain and uniquely challenging economic times. This is simply because there is very little baseline for predicting the type of economic shock that is about to hit the global economy, which means that any predictions are educated guesswork at best.
It’s also another big week for US markets, with a raft of economic announcements due out culminating in Friday’s US employment report for April, which will post a record number of job losses in a single month of up to and potentially over 20m.
On the plus side oil markets managed to close the week higher, after three weeks of losses, as the new OPEC production cuts kicked in, and US producers were forced to cut output as storage filled up. Rig counts were cut for the seventh week in succession, to their lowest level since June 2016, according to Baker Hughes. With a number of countries starting to ease lockdowns, if only gradually, the hope is that fuel consumption should start to increase slightly in the coming weeks, which should see storage levels start to diminish slowly.
EUR/USD – last week’s break above the 1.0900 area has seen the euro move up towards the 1.1000 area, and the highs two weeks ago, towards the 200-day MA at 1.1035. This remains the next barrier for a move towards 1.1200. Support now comes in at the 1.0900 level as well as the recent lows at 1.0720.
GBP/USD – the break through the 1.2500 area last week has seen the pound break higher towards the 200-day MA and April highs at 1.2645. This remains a key resistance and a major obstacle to further gains. A move back below 1.2480 opens up the risk of a return to the recent lows at 1.2245.
EUR/GBP – last week’s failure to push below the 0.8670/80 area, has seen a sharp rebound, which could bring us back to the 0.8870 area. Only below 0.8670 argues for a return to the 0.8620 level.
USD/JPY – found support just above the 106.20 area last week, with a rebound to the 107.50 area. A break through here could well see a revisit of the 108.20 area initially, as well as the 200-day MA at 108.50.