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Caution returns at the end of a turbulent week

20-5-2020 10:34:1620-5-2020 10:12:06The rebound in European and US markets continued yesterday, with the Dow posting its strongest three-day winning streak since the 1930s. The gains came despite an absolute shocker of a weekly jobs number, which saw 3.3m Americans claim for unemployment cover in the previous week.

This was way above the consensus number of 1.7m, which to all intents and purposes was on the conservative side, after it was revealed that 1m Canadians had also applied for benefit claims earlier in the week.

The reality is that markets knew this was going to be a shocker of a number, and so were largely expecting a number in the millions. It doesn’t change the feeling that some market participants might be getting ahead of themselves. Next week’s number is expected to be equally as bad, if not worse, and we also have the US March employment report, which is likely to be more of an unemployment report, and also likely to to break the record for the worst report ever.  

While US markets have seen gains in excess of 15% in the past three days, markets in Europe have lagged behind a touch, hindered to some extent by the fragmented response from various eurozone governments to the crisis. Europe hasn’t been helped by signs that the outbreak in Spain is getting worse, while the Italian situation isn’t slowing down anywhere near as quickly as people originally thought.

Markets in Asia have played catch up this morning with decent gains across the board, however this doesn’t look as if it will translate into a similar positive open for European markets this morning, as caution returns ahead of the weekend. A weaker open after three days of gains is not altogether surprising against such an uncertain backdrop, as cases in the US rise above those in China, while the infection rate in Italy appears to be rising again.

Against this sort of backdrop it is still way too early to sound the all-clear, and while yesterday’s rebound was welcome, it takes no account of the fact that the infection count and death rate is likely to continue to rise sharply in the coming weeks, and that in any subsequent recovery, consumer incomes and confidence will take some time to recover.

Markets appear to be pricing in a V-shaped recovery, or some form of U-shaped one. Neither is likely, and it was a fear articulated by the Bank of England yesterday, who warned of the risk of lasting damage to the UK economy, as a result of widespread business failures, and a sharp rise in unemployment.

The continued sharp decline in oil prices yesterday points to a collapse in demand, and runs completely counter to the rally in stock markets. While some would point to the Saudi’s flooding the market with oil, the reality is that even without the price war between Saudi Arabia and Russia, oil prices would still be sharply lower, with the IEA predicting the potential for a 20m barrel a day drop in demand over the course of the rest of the year.

Quite simply it is wishful thinking to suggest anyone will be jumping straight on to a plane, or going out and splashing the cash on a holiday, or other discretionary spending, once this crisis is over. Consumer confidence is a fragile beast and economic shocks leave lasting bruises, and this one has barely started.

One of the main reasons for yesterday’s strong rebound was the passing of the $2trn stimulus bill through the Senate, and which will now head to the house for a vote today. We also had comments from Fed chair Jay Powell to the effect that the Fed still had plenty of ammunition in its locker, and would be prepared to use that if required, to help support the US economy, and provide a bridge for a recovery.

The trillions of US dollars of stimulus from central banks, as well as governments this week, appears to have helped put a short-term floor under stock markets, however all bear markets have strong counter reactions, and this move higher could well be one of those. It is also important to remember that despite the gains we’ve seen this week, we are still well short of getting close to reversing the losses of last week.

As well as the labour market, US consumer spending patterns are also set to come under scrutiny, and while consumer confidence and retail sales have been strong in recent months, these are likely to fall off a cliff in the next few weeks.

Today’s personal spending numbers for February could show the first early signs of a slowdown in consumer spending, and even if they don’t, expect a sharp reversal in the March numbers. Spending is expected to rise by 0.2%, with personal incomes up 0.4%. Neither of these numbers are likely to offer comfort in the coming weeks, as the US economy gets set to hit the buffers very hard.

Key forex pairs snapshot

EUR/USD – broke above the 1.0920 area, as well as 1.1000 yesterday, and could well revisit the 1.1200 area in the coming days. The break through the 1.0920 area now sees this area act as support.  

GBP/USD – yesterday’s break above the 1.2000 area, offers the prospect of further gains towards 1.2500. The inability to hold below the 1.1960 area for an extended period of time, has all the hallmarks of a classic bear trap. A move to 1.2500 is the minimum requirement, while above 1.1960.

EUR/GBP – has continued to range, but with a slight downward bias, with a break below the 0.8980 required to signal a potential top is in. we have resistance at 0.9330, as well as the recent highs at 0.9500. To have confidence that we could see further losses we need to move back below 0.8980, to target 0.8820.

USD/JPY – after three failed attempts to overcome the 111.80 area and trend line resistance from the 2015 highs, we’ve slid back towards the 109.20/30 area. A move through 109.20 opens up a retest of the 108.20 area and 200-day MA.


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