Over the last few years investors have become used to the idea that global stock markets can only go in one direction. In the last five years, we’ve seen the rise of populism in bringing about the Brexit vote, the election of Donald Trump as US president, regular flareups in the Middle East, US-China trade tensions, and even the sight of North Korean ballistic missiles fly over Japanese territory and land in the middle of the ocean.
On every one of these occasions, markets have more or less shrugged their shoulders, but not before undergoing a brief spasm. This year, with the economic lockdowns caused by the coronavirus pandemic, it was widely thought that this time would be different, and markets would continue falling. Certainly, if you look at the sheer scale of the economic hit they should be, however ever since the lows in March we’ve been steadily recovering lost ground, on a combination of unlimited central bank easing and the prospect of huge amounts of fiscal stimulus.
It shouldn’t therefore be too surprising that US stocks appear to be putting to one side the night time curfews as well as the prospect that the US military might have to take to the streets of US cities, if US governors can’t deal with the unrest currently sweeping across their states.
None of these concerns prevented US markets closing at their best levels in three months, following from similarly positive Asia and European sessions, and this looks set to continue this morning, in the wake of another strong Asia session. The Nikkei 225 rose to its highest levels since late February in the wake of a big improvement in the latest Caixin services PMI from China, which recorded its best reading since October 2010, and its first positive reading in four months, rising from 44 in April to 55. Backlogs of work fell for the third month in a row, as the Chinese economy continued its recovery from its February lockdown. This positive spill over looks set to continue here in Europe, as markets extrapolate the improvements seen in the latest China data into the rest of the world.
For all of this ability for stock markets to be able to shrug off anything that can be thrown at them, there continues to be a growing sense of unease at the disconnect between what is happening on Wall Street, and what is unfolding on main street in terms of sharply rising unemployment. While markets are being fuelled on a bonanza of cheap money, there is a growing worry that investors are mispricing the economic scarring that is likely to be left once the full effects of the current crisis have started to become more apparent.
Today’s latest services PMIs numbers for May are expected to be another such example of this growing disconnect, even though we can expect to see a sizeable improvement from the horror show that was the April numbers. We’ve already seen evidence of this improvement in the recent flash PMI numbers out of Germany, France and the UK a few days ago. In essence they would have struggled to be much worse than what we saw in April, and while we can expect to see some significant improvement as lockdowns are eased, the numbers are still expected to shockingly bad, and more importantly well below 50. Just because France sees an improvement from 10.2 in April to 29.4 in May doesn’t mean that the numbers aren’t still bad. It just means they are less bad than awful.
The biggest worry remains around Spain and Italy, who rely so much on tourism in their services sector, and whose recovery is likely to be slow and painful, as tourists stay away. The recent flash numbers from France, Germany and the UK saw improvements from a record lows in April to 29.4, 31.4 and 27.8 respectively. Spain and Italy are also expected to improve from the record lows of 7.1, and 10.8, however even if we get a significant improvement in the May numbers, we will still see an awful contraction in Q2, and that’s before either economy looks at getting itself ready to open for what’s left of the remaining European holiday season.
EU unemployment for April is expected to show the first signs of a sharp move higher in joblessness across the block today, with a sharp rise to 8.2% from 7.4% in March.
In the US we will also be getting a taster of this Friday’s US non-farm payrolls report with the release of the latest ADP payrolls report for May. On top of the 20.2m jobs lost in April it is expected that we will see another 9m added to that tally, with the prospect that by the summer up to a quarter of the US population could be out of work, taking the unemployment rate to depression level heights of close to 20%. This feeling of hopelessness that comes with the prospect that the job you were in may well not come back any time soon, may help explain the explosion of civil unrest currently rippling across the US, even if it wasn’t the spark that lit the match.
EUR/USD – finding some resistance up towards the 1.1210 area but needs to push up through the 1.1220 area to target move towards the peaks this year at 1.1495. Pullbacks are now likely to find support down near last week’s breakout area at 1.1035.
GBP/USD – broke through the 1.2400 area on Monday, and as such opens up the prospect of a move towards the 200-day MA and the recent highs at 1.2650. Trend line support from the March lows remains back down near the 1.2240 level, with a break below the lows this week opening up the lows last week at 1.2075, with support below that at 1.1980.
EUR/GBP – found support near the 0.8870 level yesterday after the sharp decline from the 0.9050 peaks of last week. A fall below 0.8870 is needed to open up a move to the 0.8740 area.
USD/JPY – the break above the 108.00 area triggered stops through the 200-day MA and potentially opening up a move towards the 109.30 area, and April peaks. The 108.30 area should now act as support for a return towards the recent range highs.
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