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Market optimism holding up despite fragile fundamentals
Market optimism holding up despite fragile fundamentals
Optimism over warm weather supporting the gradual return to normal activities following a more than two-month lockdown period globally holds equities in demand as commodity currencies hold to their gains with oil prices climbing above $30 for the first time since mid-March 2020 on hope of growing demand and output cuts. There are yet good reasons to consider that a reality check might occur, as market price action appears short-term biased. The remaining 10% of S&P 500 earnings are now turning to cyclicals (i.e. retail, media and travel), one of the industry that was most hit by the pandemic while the 2Q releases are likely to prove worth as the US $3 trillion Coronavirus relief package is expected to face opposition in the Senate after passing through the House of Representatives. Meanwhile, a resumption of Sino-American trade discord after new restrictions were added against Huawei by limiting chips supply favors safe-haven, the dollar gold and eventually Bitcoin instruments should the situation worsen. In this regard, a rapid V-shape recovery seems unrealistic as analysts EPS expectations continue to be pushed downward, as downside risk prevails.
Although “medical metrics” as stated by Fed Governor Jerome Powell should remain key data for now, it appears that negative economic data are set to follow, with most economies expecting to see a rebound in GDP figures not before 2021. On the wire, GDP figures for the first quarter in Japan are pointing at an annualized contraction of -3.40% (prior: -7.30%) and -0.9% (prior: -1.90%) quarter-on-quarter, thus maintained in recession and expected to decline by as much as -22% in current quarter according to estimates, which would mark a record low. Due tomorrow, UK labor, ZEW indicators in Germany and Europe as well as US housing data should maintain investors on the sideline ahead of Ascension Day. Brexit talks combined with speculations over negative interest rates in the UK should maintain the British pound under pressure. Currently trading at 1.2105, its lowest level since end-March 2020, the cable is expected to face a pullback along 1.2024, the 76.4% Fibonacci extension of 30 April 2020 high.
Risk-on sentiment resumes
The global risk recovery is set to pick up at the start of the week as Fed Chai Powell expressed optimism that the US growth story will improve in 2H. S&P 500 futures (1.15%) pushing up Asian equities Nikkei (0.48), Shanghai Composite (0.47%), and Kospi (0.51%) despite news that the Japanese economy had fallen into recession as Covid crisis took its toll on business and consumer spending.
With the weather improving in the western world consumer are emerging from corvid lockdown, which helps push oil prices higher on hopes (wti 5.30%) that continued output cuts, and gradual recovery in fuel demand would reduce the global supply glut.
SNB Governing Board member Andrea Maechler told Swiss newspaper Neue Zuercher Zeitung that a V-shaped recovery is unlikely for the Swiss economy. Despite negative prediction from the central bank, demand for safe-haven CHF has not diminished. EURCHF remains above the 1.0500 threshold as the SNB defends the Swiss franc with physical intervention. In other safe-haven assets, The USDJPY remains offered above the 107 level, and gold is nervously bid past $1750 per oz. Investors remain cautious on gold’s limited capacity to hedge against accelerated risk sell-off, but growing market nervousness could expose the gold’s upside potential and encourage a rise toward the $1800 mark. Bitcoin recovery bounce off the $8199 looks to test $10k in the near term.
In an interview with the Telegraph BoE chief economist And Haldane refused to reject the idea of negative interest to support the UK economy. Haldane also hinted that the BoE could follow the Fed strategy by pushing lower-quality financial assets under the central bank's bond-buying program- As expect the news further weakened the already weak pound. GBPUSD is now trading near one-.month lows at 1.2100. Break of psychological 1.2000 mark, should trigger a quick move toe September low at 1.1955 then 1.1930 March high. This significant dovish shift in the BoE’s stance could give support to British stocks near term. Yet the shadow of forgotten Brexit uncertain and rising possibly of no-deal EU divorce should continue to weigh on UK assets.