Equity markets in Europe largely finished lower yesterday as traders were fearful the reopening of economies might spark a spike in the rate of new Covid-19 cases.
By international standards, South Korea and Germany were relatively quick to reopen aspects of their economies, which was initially seen as major progress, but there have been reports that coronavirus cases have increased. China is in a similar position. Generally speaking, it was one-way traffic in terms of the new infection rate tapering off and the move towards the reopening of economies, but now traders are cautious we could be in for a second wave of Covid-19.
In recent weeks, global equity markets have been gaining ground as countries managed to stem the spread of the virus as well as loosen their lockdown restrictions. For a while there, everything was progressing nicely, but now dealers are a little worried the health crisis might flare up again. Reopening segments of the economy was always going to be a risk, but nations quickly adapted to the pandemic, so no doubt a reaction will be put forward should the health situation deteriorate at a fast rate.
The fear in relation to the prospect of the Covid-19 crisis resurfacing in a serious way acted as a good excuse for equity traders to take some money off the table seeing as indices have been relatively strong recently. The losses that were racked up in eurozone markets were small when you take into consideration how much ground has been travelled since late March. The FTSE 100 eked out a tiny gain yesterday on account of the weak pound.
In New York, the major indices finished on a mixed note. The Dow Jones closed lower, the S&P 500 essentially ended the day flat, while the NASDAQ 100 posted a gain in excess of 0.8% - the tech sector has been a standout performer recently.
Overnight China posted its latest inflation data. The CPI rate for April was 3.3%, and economists were expecting 3.7%, and keep in mind the March reading was 4.3%. The PPI update was -3.1%, while the consensus estimate was -2.6%. The previous PPI report was -1.5%. Weak oil prices are likely to have been a factor in the poor readings. Stocks in Asia traded lower on account of the underwhelming data from China, strained US-China trade relations, as well as concerns about a second wave of covid-19 infections.
Haruhiko Kuroda, the head of the Bank of Japan, said the central bank will do ‘whatever it can’ to tackle the crisis, while speaking in the Japanese parliament. The Nikkei 225 is still in the red despite the dovish statement.
The pound sold off yesterday as dealers felt the UK’s exit strategy from the lockdown will be too slow. Prime Minister Johnson laid out his plans to unwind the lockdown restrictions on Sunday, and traders felt the process would keep the British economy in an economic coma for too long, so the pound came under pressure. In light of what is going on in Germany and South Korea, a gradual loosening of the restrictions might not be a bad thing in the near term as far as the health situation is concerned.
Oil saw a lot of volatility yesterday as Saudi Arabia announced that it would cut production by an extra million barrels per day from June. Kuwait and the UAE followed in the Saudis’ footsteps and revealed plans to cut output too. The move initially drove the energy market higher as traders focused on the supply side of the move, but the bullish sentiment ran out of steam as traders became worried that a possible resurgence of the coronavirus could hammer the already weakened demand for oil.
The US dollar pushed higher yesterday as it seemed to attract safe haven flows. Dealers seem to be seeking out some stability in the currency markets, and the greenback is benefitting as there is a perception the Fed are content to keep policy on hold. The Bank of Japan recently opened the door to further easing, the lack of a coordinated rescue from the EU is hanging over the euro, and sterling is languishing because of the UK’s lockdown policy.
Gold was hit by the positive move in the greenback yesterday. The metal is priced in US dollars so the inverse relationship played out. In recent weeks, gold has seen low volatility and it hasn’t moved too far away from the $1,700 mark, so the wider bullish trend is still in place.
At 1.30pm (UK time) the US CPI reading will be posted and the April level is tipped to be 0.4%, which would be a huge fall from the 1.5% registered in March. The core CPI reading is deemed to be a better reflection of underlying demand, and the metric is expected to 1.7%.
EUR/USD – has been range bound recently and a break below the 1.0768 area should pave the way for 1.0636 to be tested. A move higher from here might run into resistance at 1.1000.
GBP/USD – has lacked direction recently, but while it holds below the 50-day moving average at 1.2371, the bias should remain to the downside, and it might target 1.2165. The 200-day moving average at 1.2650 might act as resistance.
EUR/GBP – while it holds above the 100-day moving average at 0.8659, the bias might remain to the upside, and 0.8865 might act as resistance. A break through 0.8659 might pave the way for 0.8600 to be tested.
USD/JPY – has been pushing lower since March and a break below 106.00 might see it target 104.00. 108.22, the 200-day moving average, might act as resistance.