After the big falls seen at the end of last week, European markets got off to a fairly decent start this week, at least those that were open, and even though yesterday’s rebound wasn’t able to fully reverse the declines seen on Friday, markets were reasonably buoyant.

The Friday sell-off may have been exacerbated to some extent by some profit taking, and month-end portfolio readjustment after yet another month of decent gains, as markets continue to claw back the big losses we saw in March.

There was also a concern ahead of President Trump’s speech on Friday that the president might overstep in any reaction to events in Hong Kong, and China’s implementation of a new security law. Despite the bluster, his actions on Friday were targeted specifically at officials with ties to the Peoples Liberation Army. He also revoked Hong Kong’s preferential status as a separate travel territory from China, though he stopped short of targeting Hong Kong’s trade which is currently exempt from the tariffs the US has imposed on China.

US markets also got the week off to a positive start despite the images of civil unrest in US cities as a result of the death of George Floyd, while being arrested by Minneapolis police. The main focus once again appeared on the longer-term prospects of the easing of lockdowns across the world, though if the violence on US streets continues for much longer, US investors might have to cope with a lockdown of a different kind, imposed by the National Guard. This is something that President Trump hinted he might well do if the various states aren’t able to contain the outbreaks of violence across US cities.

The economic data yesterday continued to point to gradual improvements across the world, with the latest manufacturing PMIs clawing their back, with Italy undergoing a surprising improvement in May jumping from 31.1 to 45.4, a particularly welcome development given how hard parts of the economy have been hit by the Covid-19 pandemic.

Despite the continued improvements in the data, and the ongoing relaxation of the lockdowns their remains an undercurrent of anxiety that some countries might be moving too fast, and risking a second wave of infections as images of packed beaches over the weekend cross the news wires.

These concerns still shouldn’t prevent today’s European market open being a positive one with the German DAX set to play catch-up, after being closed yesterday, as it looks to open at its best levels since 5 March and close to its 200-day moving average.

The pound underwent a decent rebound yesterday after some big losses last week, touching a four-week high against the US dollar in the process. There didn’t appear to be one single factor driving the recovery apart from a weaker US dollar, though with an ECB rate meeting later this week, some of that optimism that has seen the euro rise sharply in the last few days may well be starting to unwind a touch.  All of the optimism over last month’s noise over a €750bn EU recovery fund, as well as a possible extension to the ECB’s PEPP program has seen some paring of positions.

This shouldn’t be too much of a surprise given that there is likely to be significant push back against both, if some of the chatter on the European grapevine is anywhere close to the truth. It’s certainly no secret that Austria, the Netherlands, Sweden and Denmark aren’t particularly enamoured to be asked to pony up extra money for a recovery fund, without any say as to where it is likely to go.

There is also some chatter that some ECB governing council members aren’t too keen on topping up or extending the PEPP programme. This shouldn’t be too surprising given the recent German court ruling on the legality of the previous asset purchase programme. Any further action by the ECB so soon after last month’s ruling could well be interpreted negatively politically in some circles. UK and EU trade talks are also set to resume later today against the backdrop of negativity that took place last week where both sides expressed scepticism about whether a deal was possible.

Today’s UK mortgage approvals for April are expected to show that lending collapsed from the numbers seen in March, which came in at 56,200. With the UK economy effectively locked down and the housing market effectively shuttered, the only activity is likely to have been re-mortgages, and as such April approvals are expected to slip to 24,000. Net consumer credit is also expected come in with another negative number, after March’s -£3.8bn, with another £4.5bn expected to have been repaid. 

Nobody in the type of situation we find ourselves in now will feel compelled to borrow money unless they have absolutely no other choice, and with the government furlough scheme currently in place it is unlikely that this will change that much in the coming months.

EUR/USD – pushed up to a two-month high yesterday, as it closes in on the 1.1200 area. 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 yesterday, opening up a move back 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 – reversed sharply from the 0.9050 level last week, with yesterday’s fall potentially opening up the prospect that the top is in and the potential for further weakness in the days ahead. A fall below 0.8870 is needed to open up a move to the 0.8740 area

USD/JPY – treading water for now below the 108.00 level with the 108.30 a key resistance. A move through 108.30 and the 200-day MA targets the 109.00 area. Currently has support at the 107.30 area.


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