Equities rebound on Covid breakthrough as cases mount

Morning Note

Stocks are in recovery mode as investors are energised by the prospect of further stimulus, a rebound in US retail sales and on hopes of a ‘major breakthrough’ treatment for serious cases of coronavirus. The Fed’s decision to buy individual corporate bonds and hopes the White House will swing a $1tn infrastructure package continue to help lift the boats.

US retail sales jumped 17.7% in May from the previous month, but still remain down sharply on a year-over-year basis – remember sharp rebounds are to be expected after the easing of lockdown, it doesn’t mean things are peachy.

Scientists in the UK found a cheap and widely available steroid, dexamethasone, reduces mortality rates among hospitalisations for covid-19. Meanwhile AstraZeneca says it will have a vaccine ready by October that will protect people for one year.

Markets overlook second wave fears and India-China tensions

Meanwhile investors are shrugging off fears of a ‘second wave’ as we see rising numbers of cases in the US and an outbreak in Beijing that has prompted the Chinese authorities to introduce new travel restrictions. Markets also seem unconcerned by a confrontation between India and China that left several soldiers dead on both sides.

Whilst investors will need to monitor the situation closely, I would not expect any serious escalation to impact financial markets. China’s foreign ministry said this morning the overall situation is stable and controllable.

European equities surged three per cent yesterday, while Wall Street rose 2%. This morning stocks in Europe extended gains with the FTSE 100 advancing back to 6,300 and the DAX above 12,400. The S&P 500 yesterday closed a point above the 3,123 level that we talked about, which was the Thursday opening daily high. Futures indicate a higher open as stocks in Europe open up firmly.

UK inflation slows sharply, eyes on Bank of England tomorrow

Data this morning showed UK inflation at a miserly 0.5%, which was in line with expectations, but again signals the very deflationary impact of the pandemic right now. But as previously discussed, there may be a large dose of inflation coming round the bend.

The Bank of England will tomorrow almost certainly announce more QE, likely increasing purchases by at least £100bn. Numbers yesterday pointed to a looming unemployment crisis in the UK as businesses slash jobs over the coming months.

FX majors hold ranges, oil rises on improved IEA demand outlook

In FX, the majors are holding their ranges. GBPUSD moved back under 1.26 having broken down at the 200-day moving average at 1.2690 yesterday, looking potentially to test the 100-day line around 1.2530 before a retest of Monday’s lows around 1.2450 as a near-term support. EURUSD pulled back under 1.13 having again bounced off the 23.6% Fib level around 1.1230 yesterday.

Crude oil rose on the turnaround in risk sentiment and gained further support after the International Energy Agency raised its oil demand outlook by 0.5m bpd to 91.7 million bpd. Near-term there are still pressures though – API inventories showed a rise of almost 4m barrels.

EIA figures today may show a slight build – but as noted last week the consensus estimates for these prints have been quite wide of the market over the last couple of months. Whilst risk is bid right now as equities climb, a rise in cases in the US and China may dampen hopes for an immediate rebound in oil demand.