European equity markets saw major volatility yesterday as traders were finding their feet amid the growing health crisis.
The indices opened higher on optimism that a number of central banks would alter policy to assist their economies, and that spurred on buying. The upbeat mood didn’t last long as old fears set in and the gains turned to losses.
The number of confirmed cases of coronavirus grew, as did the number of new countries impacted by the health crisis. The fear of the unknown weighed on sentiment. It seems as if the travel sector is at the forefront of the crisis, and airlines such as British Airways, Ryanair, as well as Lufthansa all revealed plans to cancel lights. The announcements chipped away at overall sentiment.
By days end, it was a mixed picture. The FTSE 100 outperformed thanks to its relatively large exposure to commodity stocks – mining as well as oil & gas. The weakness in the pound helped too as many internationally focused firms tend to benefit from a slide in sterling as their overseas revenue gets booked in pounds. The British index closed higher. While the DAX and the FTSE MIB finished lower, but they both ended the session off the lows of the day.
Trading in the US was choppy for the first 60 or 90 minutes but then the bullish mood set in, and the major indices all registered sizeable gains – the Dow closed up more 5%, while the S&P ended up 4 6%. The speculation the Federal Reserve will aggressively cut interest rates later this month went into overdrive, as the markets were pricing in a 96% chance of a 0.75% interest cut – which would be colossal. Dealers snapped up US stocks on the view the Fed will be taking drastic action in a few weeks.
Overnight, equity markets in China pushed higher on the back of hopes the Chinese central bank would provide assistance to the economy. The Reserve Bank of Australia cut interest rates to 0.5% from 0.75%, meeting forecasts. The rate is now at a record low, and the central bank signalled that rates could go lower if needed.
Speaking of interventions, there was a lot of chatter that OPEC will reduce output as a means of stabilising the oil market. Since the outbreak of the health emergency, the energy has taken a battering so it’s no wonder there is talk the oil producing nations are keen to influence the energy market. Oil enjoyed a huge rebound yesterday.
The euro gained ground on two fronts. The major fall in the US dollar assisted the single currency, but so did the fear the UK and the EU could end up in a no-deal scenario post the transition period. Sterling’s decline on no-deal fears assisted the euro, even though an outcome would hurt the eurozone too.
Manufacturing in Europe is still mixed as Spain and the UK showed expansion last month, while Italy, France and Germany all registered contractions. It is worth noting the German level was the highest in one year. The US update wasn’t great as the ISM manufacturing reading cooled to 50.1 from 50.9. The finer details of the ISM reading were poor as the new orders, prices paid as well as the employment components came in at 49.8, 45.9 and 46.9 respectively.
At 9.30am (UK time) the UK construction PMI report will be posted, and economists are expecting 49, which would be an increase from 48.4 in January.
The eurozone will reveal a couple of economic reports at 10am (UK time). The flash CPI level is tipped to cool to 1.2% from 1.4%, while the unemployment rate is predicted to hold steady of 7.4%.
EUR/USD – rebounded late last month and if the bullish move continues it might target 1.1249. A pullback might find support at 1.1028, the 50-day moving average.
GBP/USD – has been pushing lower since late January and further losses might target 1.2600. A rebound might encounter resistance at the 50-day moving average at 1.3018.
EUR/GBP – rallied from mid-February and while it holds above the 100-day moving average at 0.8516, the outlook should stay positive, and it might target 0.8786. A move below the 0.8600 zone should bring 0.8516 into play.
USD/JPY – has been pushing lower for over one week and while it holds below the 200-day moving average at 108.40 the bearish move should continue. A break below 10.7.29 it might target 107.00. A retaking of the 50-day moving average at 109.56 could open up the possibility of 110.00 being targeted.
CMC Markets is an execution-only service provider. The material (whether or not it states any opinions) is for general information purposes only, and does not take into account your personal circumstances or objectives. Nothing in this material is (or should be considered to be) financial, investment or other advice on which reliance should be placed. No opinion given in the material constitutes a recommendation by CMC Markets or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although we are not specifically prevented from dealing before providing this material, we do not seek to take advantage of the material prior to its dissemination.