There is finally some questioning among investors that the latest equity rally may have gone too far and a part of gains may be unfounded due to weak economic data, rising political unrest in US and Hong Kong and tenser trade relations between the US and China. The commemoration of Tiananmen events in Hong Kong added fuel to fire on Thursday.
If the human and political dimension of street protests do not worry investors, the fact that such gatherings increase the risk of a renewed rise in new coronavirus cases should.
Equities in Asia were mixed following a mostly negative European and US sessions.
The Nikkei (+0.49%) and ASX 200 (+0.27%) extended gains, as stocks in mainland China retreated. Hang Seng was flat.
But safe haven assets gave no sign of emergency regarding a further risk sell-off and activity on European equity futures hint at a positive start on Friday.
The US dollar index extended losses for the ninth consecutive session, the US 10-year yield advanced past 0.80%, gold traded a touch above the $1700 per oz, as the USDJPY advanced to 109.23, a two-month high. Only the Swiss franc gained against the greenback.
On the data deck, the jobless claims in the US rose 1.8 million last week, less than the past weeks’ average, but the continuing claims rose above 21 million, hinting that the pool of unemployed continued bloating despite relaxed confinement measures across the US. Today, the US nonfarm payrolls should confirm near 8 million additional job losses in May and a significant slump in average earnings to 1.0% from 4.7% printed a month earlier. Hence, despite the market’s rising hope for faster post-Covid recovery, the reality remains somewhat short of expectations.
While bad economic data may not dampen the mood, the delayed announcement of further fiscal stimulus from the Trump administration could. According to latest news, the discussions that were scheduled for this week are postponed and new fiscal aid measures may not be effective before July in the US.
In Europe, however, more monetary stimulus gave a decent boost to the single currency. The European Central Bank (ECB) announced at yesterday’s monetary policy meeting the extension of the Pandemic Emergency Purchasing Program (PEPP) by 600 billion euros, versus 500-billion-euro expected by analysts. The additional 100-billion-euro has been perceived as Christine Lagarde and the ECB’s confidence on the actual monetary policy and their determination to give support to the European economy despite the German court’s request for justification of their massive sovereign debt purchases. As a result, investors continue putting their trust in the ECB and this gives a sustainable positive spin to the single currency. The EURUSD pulled out the final major technical resistance 1.1290, the minor 76.4% Fibonacci retracement on March debasement, before 1.1495, the year-to-date peak. At this point, technical indicators point at strongly overbought conditions and a minor downside correction in euro could be healthy at the current levels. However, price retreats could give good dip-buying opportunities for the euro-bulls targeting a further rise towards the 1.15 mark.
Cable on the other hand loses momentum above the 1.26 mark, which has acted as a decent resistance to the past three-month’s slightly down-trending channel. This week’s Brexit talks will likely lead to no breakthrough, other than leaders agreeing to keep talking, which shouldn’t change the UK’s decision to crash out of the EU by the end of this year. With no-deal Brexit worries hanging in the air, the soft US dollar could be the only catalyzer of a stronger GBPUSD in the short run. The mid-term outlook remains negative for sterling. Price advances could be good selling opportunities for mean reversion traders.
WTI crude consolidates a touch below $38 per barrel as investors await an official confirmation of further OPEC+ output cuts, but it appears that news won’t hit the headlines before the weekly closing bell. There is many contradictory news regarding the OPEC+ meeting. Some sources say that the meeting will take place on Saturday, while others claim that the delay in OPEC+ announcement may be due to poor compliance with oil producer nations’ commitment to cut supply. The latter scenario could dampen the mood and erase a part of recent gains in oil. With rising risks of a less suitable OPEC+ deal to lower production, oil will likely close the week flat-to-negative.