05-5-2020 10:15:0805-5-2020 10:05:48Stock markets in Europe largely finished in the red as the same old coronavirus fears impacted sentiment.
Before the European trading session got underway, the Bank of England revealed a surprise interest rate cut of 0.5%, which took rates down to a level last seen in the wake of the UK’s EU referendum. The news ensured that stocks got off to a strong start, but the bullish sentiment didn’t last long and markets began to hand back their gains after about 60 minutes of trading. It’s not a good sign when stocks can’t hold onto their gains.
The World Health Organisation described the coronavirus crisis as a ‘pandemic’, and that intensified the selling pressure. In a bid to reassure the markets, the New York Fed increased the amount of money available in the repo market to at least $175 billion, up from $150 billion it set on Monday. The news didn’t halt the decline in US banking stocks, in fact, one could argue the announcement put more pressure on them as it points to weakness in the banking industry. Sentiment on Wall Street was sour as the Dow Jones, S&P 500 and the NASDAQ 100 lost 5.9%, 4.9% and 4.4% respectively. The Dow closed more than 20% below the record close that was set last month – it entered a bear market.
A short while after the close of trading in New York, President Trump revealed some plans to combat the health crisis. The US will impose a ban on people travelling from Europe for 30 days – this will apply to the Schengen area. Goods and cargo will not be impacted by the restrictions. The Small Businesses Association will provide credit and liquidity to help small firms ride out the rough patch. The US president said he will push for a payrolls tax relief, but no stimulus in particular was announced. The result was a sharp fall in US index futures, hence why stocks in Asia are in the red. European equity markets are called much lower and long haul airlines such as BA’s parent, International Consolidated Airlines Group and Air France, are likely to be hit hard.
Going into the Budget, there was chatter, that Rishi Sunak, the Chancellor of the Exchequer, would reveal a spending splurge ,and he lived up to the expectations. Mr Sunak plans to spend £600 billion in the next five years as he wants to bring about a ‘decade of growth for everybody’. The politician wants to ramp up spending on research & development, broadband, affordable housing plus infrastructure. The ultra-low interest rate environment means the government can borrow cheaply, but the money needs to be put to go use – help productivity and spur on economic growth.
The relatively new Chancellor earmarked £30 billion to combat the coronavirus crisis, and that included initiatives such as statutory sick pay for people who self-isolate, and a loan scheme will be set up for businesses that experience disruption on account of the health crisis. The high street will be assisted too as business rates for the leisure and retail sector will be scrapped. The updates show the government is keen to alleviate potential problems. The FTSE 100 and the FTSE 250 lost more than 1% as the wider bearish sentiment took hold. Eurozone equity markets mostly finished lower as there was selling pressure across the board.
The oil market drove lower too as traders were worried about supply as well as demand. The head of Saudi Aramco, Amin Nasser, was asked by the nation’s energy ministry to lift production to 13 million barrels per day, keep in mind the current output is below 12 million barrels per day. It seems the Kingdom are keen to drive the price lower to hurt Russia. The slide in US stocks added to the concerns that demand for energy will dwindle, so WTI plus Brent crude were hit by both angles.
Eurozone Industrial production will be posted at 10am (UK time) and economists are expecting 1.4%, which would be a big rebound from the 2.1% fall suffered in December.
The US PPI rate is expected to fall to 1.8% from 2.1%, while the core reading is tipped to remain at 1.7%. Yesterday, CPI cooled form 2.5% to 2.3%, but the core reading edged up to 2.4% from 2.3%. The jobless claims reading is forecast to be 218,000, which would be a slight increase from the 216,000 registered in the previous week. The reports will be posted at 12.30pm (UK time).
The European Central Bank will reveal its interest rate decision at 12.45pm (UK time). Traders are expecting the refinancing rate to stay at 0.0%, while the deposit rate is widely believed to drop to -0.5% from -0.4%. The press conference will begin at 13.30pm (UK time).
In recent weeks we have seen interest rate cuts in the UK, the US, Australia as well as Canada, so the ECB are likely to keep up with the herd to help the euro’s competitiveness. It is possible the ECB might copy the BoE and peruse a term funding scheme to help smaller firms gets access to funds as the health emergency is likely to hurt many industries.
EUR/USD – Tuesday’s candle has the potential to be a daily bearish reversal, and a further move lower might see it target 1.1200. Should the wider bullish move continue, it could target 1.1570.
GBP/USD – turned sharply lower on Tuesday and while it holds below the 1.3000 mark, it might lose further ground. 1.2726 might act as support. A move above the 1.3200 area might put 1.3284 on the radar.
EUR/GBP – rallied from mid-February and while it holds above the 100-day moving average at 0.8520, the outlook should stay positive, and it might retest 0.8847. A move below the 0.8600 zone should bring 0.8517 into play.
USD/JPY – Tuesday’s candle has the potential to be a daily bullish reversal. If the market rises, it might target the 200-day moving average at 108.27. While it holds below the 106.00 mark, the wider bearish move could continue, and it might target 101.19.
.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.