Euro hits 4-month high as EU talks drag on

Morning Note

The euro is at a 4-month high as EU leaders continue to talk after 3 days of meetings in Brussels in an effort to get agreement on a rescue package for countries hardest hit by the pandemic. The frugal four are holding out and have a new ally in Finland, so make that the Frugal Five Get the EU into Trouble, if there is ever a book written about it. Hungary and Poland are also unhappy about tying aid to the rule of law. Hungarian Prime Minister Viktor Orban pointedly blamed the ‘Dutch guy’, meaning Dutch PM Rutte, and threatened to veto rule of law of conditionality. 

 

EU Council President Charles Michel is touting a new deal with €390bn in grants, after the Frugal Five proposed a €700bn fund split equally between loans and grants which fell well short of what most other countries are hoping for. This is already down from the €500bn first imagined by Macron and Merkel. 

 

Clearly cohesion is weak, but the EU is usually capable of working out a fudge of sorts. Talks are due to start again later today at 4pm Brussels time with early indications that the ‘frugals’ are prepared to accept the €390bn idea. The biggest hurdles are the size of grants and the conditions attached to the money.  

 

The euro has made fresh highs above 1.14, with the move to 1.14670 this morning the highest since EURUSD has printed since March. With the euro marking a 4-month high it looks like traders are expecting some kind of deal is done, even if it falls short of the original plan. As noted last week, this not an ordinary summit – what’s being talked about is mutual debt issuance for the first time. A deal would mark a breakthrough for the EU and show that the bloc can respond to an era-defining crisis with one voice. Failure today is not the end of the road by any means, but it could produce a negative reaction in Euro-area sovereign debt, European equities and the euro. 

 

European equities were softer on the open on Monday as the bailout fund talks loomed, with the major indices edging almost 1% lower to retest the lower end of last week’s ranges. The FTSE 100 tested the 50% retrace of the June range at 6220. US equities finished mixed on Friday as the S&P 500 and Nasdaq rose a touch and Dow fell slightly. Chinese equities bounced but Asia was otherwise fairly flat. 

 

Pfizer and BioNTech have agreed a vaccine deal to supply UK with 30m doses should their candidate prove successful. Hopes for a vaccine continue to underpin positive equity market sentiment despite signs of a slower recovery than the V-shaped rebound everyone had hoped for. Much hope is being pinned on a candidate vaccine being developed by AstraZeneca and Oxford University – results from phase one clinical trials are due today and could set the tone for the rest of week in equity markets. New cases in the US and globally continue to soar but hope for a cure wins over the idea of a fresh lockdown. AstraZeneca shares hit a record high this morning ahead of the results. 

 

Treasury yields were softer as markets eye the rising case numbers in the US – Friday marked a fresh record 77k new cases, whilst efforts to roll back the easing of lockdown restrictions in states like California could result in some high frequency data like initial jobless claims taking a turn for the worse.

 

Gold is well supported and trying to break above $1810 as US real rates (10yr TIPS) moved even deeper into negative territory at a new seven-year low of -0.82%.

Week Ahead: Tesla earnings and vaccine hopes to drive sentiment

Week Ahead

Coming up this week – can Tesla do enough to justify its massive valuation with its second quarter earnings release? 

Tesla Q2 earnings

Tesla (TSLA) has enjoyed a stunning rally in 2020, rising 270% year to date. In the last 12 months, the stock has risen more than 500% in what can only be described as one of the most amazing turnarounds in corporate history. Over this period the S&P 500 has gained around 7%. Valuations are out the window and the stock is trading on tech multiples – some would say for good reason, but short interest in the stock – the percentage of shares out on loan to traders betting the stock will fall – remains relatively high at 7.5% 

Tesla stock has soared in the last year 

But it’s back to basics this week as Tesla reports its Q2 2020 financial results. The company is likely to report a fourth straight quarterly profit on July 22nd, which would clear the way for it to enter the S&P 500, and may explain the recent rally as funds have decided they will need to own some of it. 

The stock pushed to all-time highs close to $1,800 after the company said it delivered 90,650 vehicles in the second quarter, well ahead of both what the company had guided and the Street expectation for 83,000 vehicles. The company has successfully ramped production at its Fremont site and the Shanghai plant also came back online after being forced to shutter in the first quarter due to Covid. China sales are picking up with Tesla selling almost 12,000 Model 3s in May. The stock also got a lift after Wedbush Securities increased its price target on the stock to $1,250 from $1,000, whilst the bull scenario got a PT of $2,000. 

Analysts remain divided on Tesla 

…but hedge funds have been increasing their holdings 

Other earnings this week to watch come from Microsoft, Coca-Cola and Unilever. 

AstraZeneca and Oxford University vaccine results

Hopes for a vaccine continue to underpin equity market sentiment despite signs of a slower recovery than the V-shaped rebound everyone had hoped for. Much hope is being pinned on a candidate vaccine being developed by AstraZeneca and Oxford University – results from phase one clinical trials are due on Monday and could set the tone for the rest of week in equity markets. 

Also watch for a reaction in AstraZeneca shares, which have rallied strongly this year to make it the largest stock on the FTSE 100 

Economic data to watch

As ever on Thursday we are anticipating an important update from the US which will help show the pace of reopening and economic recovery in the shape of weekly initial and continuing unemployment claims. 

On Friday we have UK retail sales for June, which are expected to show improvement after rebounding a healthy 12% in May following the –18% decline in April at the height of the lockdown.  

Friday also sees the release of the latest flash PMIs for the Eurozone, which a month ago showed a decent rebound. PMIs, which are diffusion indices, are particularly challenged by the speed and magnitude of the economic contraction. So, whilst they may make a V-shape, it does not mean the recovery is V-shaped. PMIs only ask if survey participants think things are better or worse than the previous month, so they give a pretty imperfect snapshot of economic activity in times of crisis. A reading over 50 only tells us things are better than the prior month, which right now is not a high bar to clear.

Highlights on XRay this Week 

Read the full schedule of financial market analysis and training.

07.15 UTC Daily European Morning Call
17.00 UTC 20-Jul Blonde Markets
From 15.30 UTC 21-Jul Weekly Gold, Silver, and Oil Forecasts
14.45 UTC 23-Jul Master the Markets with Andrew Barnett
17.00 UTC 23-Jul Introduction to Currency Trading – Is it For Me?

Top Earnings Reports this Week

Here are some of the biggest earnings reports scheduled for this week:

After-Market 20-Jul IBM – Q2
07.00 GMT 21-Jul UBS – Q2
Pre-Market 21-Jul Coca-Cola Co – Q2
Pre-Market 21-Jul Philip Morris – Q2
Pre-Market 22-Jul Biogen – Q2
After-Market 22-Jul Tesla – Q2
After-Market 22-Jul Microsoft – Q2
After-Market 22-Jul Gilead Sciences – Q2
07.00 GMT 23-Jul Unilever – Q2
Pre-Market 23-Jul AT&T – Q2
Pre-Market 23-Jul Twitter – Q2
After-Market 23-Jul Intel – Q2
23-Jul Southwest Airlines – Q2
Pre-Market 24-Jul Verizon – Q2
Pre-Market 24-Jul American Express – Q2

Key Events this Week

Watch out for the biggest events on the economic calendar this week:

01.30 GMT 21-Jul RBA Monetary Policy Meeting Minutes
02.30 GMT 21-Jul RBA Governor Lowe Speech
12.30 GMT 21-Jul Canada Retail Sales
00.30 GMT 22-Jul Japan Flash Manufacturing PMI
01.30 GMT 22-Jul Australia Retail Sales
12.30 GMT 22-Jul Canada CPI
14.30 GMT 22-Jul US EIA Crude Oil Inventories
06.00 GMT 23-Jul German GfK Consumer Climate
12.30 GMT 23-Jul US Weekly Jobless Claims
14.30 GMT 23-Jul US EIA Natural Gas Storage
06.00 GMT 24-Jul UK Retail Sales
07.15-08.00 GMT 24-Jul Flash Eurozone Services, Manufacturing PMIs
08.30 GMT 24-Jul Flash UK Services, Manufacturing PMIs
13.45 GMT 24-Jul US Flash Manufacturing PMI

Week Ahead: Pressure builds on RBA to go negative, high hopes for US ISM

Week Ahead

Coming up this week – can Eurozone retail sales follow in Germany’s forecast-shattering footsteps; will the US ISM Nonmanufacturing Index return to growth against expectations, and is the pressure mounting on the RBA to push interest rates into negative territory? 

Read on for your full breakdown of the key events to watch this week.

Eurozone confidence and retail sales 

Investor confidence in the Eurozone improved last month, although the Sentix index missed expectations with a rise from -41.8 to -24.8 against forecasts of a rebound to -22.5. 

It still represented a solid rebound after May’s index barely moved, and participants reported a much more positive outlook than before. Since then we’ve had a lot of positive data in terms of PMIs and forecast-crushing German retail sales, which grew 13.9% on the month in May, against expectations of 3.9%, which could prompt another uptick in confidence when the next reading is published on Monday. 

Eurozone retail sales figures are also due on Monday. Forecasts are for growth of 7.8% on the month after May’s -11.7% decline. 

Surprise return to growth on the cards for US ISM Nonmanufacturing Index? 

Last week’s US ISM Manufacturing Index smashed expectations with a surprise leap back into growth territory. Economists had expected the index to recover to 49.5, just shy of the 50 level that shows no change, but the index instead jumped to 52.6, with the majority of industries surveyed reporting expansion, in particular improvements in employment, production, and new orders. 

This week’s nonmanufacturing index is predicted to improve from 45.4 to 49, but after the strength seen in the manufacturing counterpart, markets will be hoping to see a reading above 50 here as well to reinforce hopes of a quick recovery for the US economy. 

Markets bet on Reserve Bank of Australia rate cut 

The Reserve Bank of Australia held interest rates at 0.25% during its last policy meeting. ASX 30 Day Interbank Cash Rate Futures show the market is pricing in a 60% chance that the RBA will cut rates to 0% during the next board meeting. Doing so would effectively take rates negative, which policymakers have been reluctant to do. 

However, pressure is mounting after localised spikes in coronavirus infections forced the government to lockdown parts of Melbourne. A further spread of infections could hamper Australia’s economic recovery, forcing the RBA to unleash more stimulus. 

Corporate earnings: Paychex, Walgreens Boots Alliance 

Paychex is expected to report earnings of $0.61 per share for the quarter ended May 2020, down -3.1% on the same period the previous year. Revenue is projected -7% lower compared to Q4 of the previous fiscal year at $911 million. The stock has moved largely in tandem with the S&P 500 all year, although since the March selloff Paychex has struggled to recoup losses as quickly, leaving it down -10% on the year, compared to -4% for the S&P 500. 

Walgreens Boots Alliance stock is up 11% from its year-to-date low, but remains over 30% lower since January 1st. According to research from Thompson Reuters, the stock has an average “Hold” rating amongst 21 analysts – you can download the full report from the Key Statistics tab in the platform. Q3 earnings are due ahead of the market open on July 9th. 

Weekly US jobless claims remain in focus 

US weekly jobless claims figures have proven stubbornly high over the past few weeks, despite having come down significantly from the record high of 6.6 million reported on April 5th. However, while initial claims have continued to disappoint forecasts, the number of continuing claims has come down a bit more than expected – although at 19.5 million it remains remarkably high and shows just how far there is to go to restoring anything like normal levels of employment. 

The latest figures are due on Thursday.

Highlights on XRay this Week 

Read the full schedule of financial market analysis and training.

07.15 UTC Daily European Morning Call
20.00 UTC 06-Jul 10 Trading Rules to Live By
From 15.30 UTC 07-Jul Weekly Gold, Silver, and Oil Forecasts
17.00 UTC 08-Jul Blonde Markets
09.00 UTC 09-Jul How to Use the 200-day Moving Average Indicator

 

Key Events this Week

Watch out for the biggest events on the economic calendar this week:

08.30 UTC 06-Jul Eurozone Sentix Investor Confidence Index
09.00 UTC 06-Jul Eurozone Retail Sales
14.00 UTC 06-Jul US ISM Nonmanufacturing
14.30 UTC 06-Jul CA BOC Business Outlook Survey
04.30 UTC 07-Jul RBA Official Cash Rate Decision
06.00 UTC 07-Jul German Industrial Production
Pre-Market 07-Jul Paychex – Q4 2020
After-Market 07-Jul Levi’s – Q2 2020
05.00 UTC 08-Jul Japan Eco Watchers Survey
14.30 UTC 08-Jul US EIA Crude Oil Inventories
08-Jul FirstGroup – Q4 2020 (Preliminary)
Pre-Market 09-Jul Walgreens Boots Alliance – Q3 2020
12.30 UTC 09-Jul US Weekly Jobless Claims
14.30 UTC 09-Jul US EIA Natural Gas Storage
12.30 UTC 10-Jul Canada Employment Change & Unemployment Rate

Week Ahead: Central banks on tap, NFP faces massive Covid hit

Week Ahead

The economic calendar is packed full of top-tier releases this week, starting with manufacturing PMIs from China and the US. The RBA, BOC, and ECB all announce their latest policy decisions – and, in the case of the ECB, potentially ruffle a few more feathers in Germany. And, of course, we have the latest US nonfarm payrolls report to round off the week. 

China Caixin Manufacturing PMI – does the headline reflect the story?

China’s Caixin Manufacturing PMI slipped back into negative territory in April, missing market expectations of another print just above the 50 mark. A look at the sub-indexes painted a rather more messy picture than the headline number. 

New orders slumped for a third month and export orders dropped the most since December 2008. Order backlogs rose, while supplier delivery times improved and input costs fell on the collapsing oil prices, pushing the headline number higher. 

May’s reading is expected to hold just below 50 – but once again, the vastly different performance of those sub-indexes is likely where the true story will lie. It looks like Chinese industry has a lot further to go yet before growth returns properly. 

US ISM PMIs to stabilise

US manufacturing collapsed last month, with the index diving to 41.5 from 49.1 in March. Despite being the worst drop since April 2009, the reading was still better than market expectations of 36.9, although this was because of a surge in supplier delivery times. While usually a sign of a strong economy, deliveries were held up by supply shortages due to the Covid-19 pandemic. 

Things are expected to have stabilised in May, but getting back into growth territory (a reading above 50) could take a while; Oxford Economics doesn’t expect output losses to be recouped until 2021. 

The decline in non-manufacturing is expected to moderate slightly, with the index forecast to tick higher to 44.2 from 41.8. 

RBA, BOC, ECB interest rate decisions

The Reserve Bank of Australia is the first of three central banks to hold monetary policy meetings this week. Rates are already at a record low 0.25%, which is effectively zero, and the board has no appetite for taking them negative. 

ASX 30 Day Interbank Cash Rate Futures for June show markets are pricing in nearly 50-50 odds of a cut to zero, but many analysts think the RBA has done all it will do, and that rates will remain unchanged for two or three years. 

This week’s Bank of Canada rate announcement coincides with the start of Tiff Macklem’s tenure as governor. Senior deputy governor Carolyn Wilkins said recently that the BOC could look at adjusting its asset purchasing programme with the aim of stimulating the economy, rather than just enhancing the liquidity of financial markets, although policymakers may not be ready for such a move just yet.  

The European Central Bank is expected to leave rates unchanged, although the pandemic emergency purchase programme (PEPP) is likely to be extended and expanded. Christine Lagarde will face questions about Germany’s ruling on the ECB’s quantitative easing programme during the post-meeting presser. Read our full preview on the ECB monetary policy meeting here.

Last week Isabel Schnabel, a member of the ECB board who joined in January, shrugged off the ruling, suggesting it was for the Bundesbank and Germany’s government to resolve the issue. 

“I’m sure there is going to be communication between the Bundesbank and the German parliament and the German government, and one will have to find a solution,” Schnabel told the Financial Times last week. “If the ECB can be constructive in supporting that process, we will of course do so.” 

Australia quarterly GDP: the end of three decades of growth

First-quarter economic data is expected to show that the Australian economy contracted -0.8% on the quarter and -1.2% on the year. Australia is expected to fall into recession for the first time in three decades this year, with GDP dropping -10%. 

Last week, Prime Minister Scott Morrison outlined the government’s plans to help revive the economy, but he also warned that any recovery was likely to take between three and five years. 

Eurozone retail sales and Germany factory orders

The collapse in Eurozone retail sales is expected to have worsened at the start of Q2. Analysts are forecasting a month-on-month decline of -18.6% during April, after a -11.2% drop in March. Year-on-year sales are predicted to have cratered -24%. 

Germany’s April factory orders data will likely reveal some similarly painful numbers. Orders fell -15.6% in March and economists are expecting a -21.3% drop when the April data is published on Friday.  

US NFP – jobless rate to hit 20%?

After tanking -20.5 million last month in the worst drop on record, this week’s US nonfarm payrolls report is expected to show another decline in employment of up to -5 million. The jobless rate, which leapt to nearly 15% in April, is likely to print just shy of 20%. Economists expect unemployment will peak around 25%, although Goldman Sachs analysts have suggested it could climb higher. 

Join Markets.com chief market analyst Neil Wilson for live analysis of the market reaction to the US nonfarm payrolls report with our free webinar.

Heads-Up on Earnings 

The following companies are set to publish their quarterly earnings reports this week:

After-Market 02-Jun Zoom Video Communications – Q1 2021
Pre-Market 03-Jun Campbell Soup – Q3 2020
After-Market 04-Jun Broadcom – Q2 2020
After-Market 04-Jun Slack – Q1 2021
05-Jun Toshiba Corp – Q4 2019

Highlights on XRay this Week 

Read the full schedule of financial market analysis and training.

07.15 UTC Daily European Morning Call
From 15.30 UTC 02-June Gold, Silver, and Oil Weekly Forecasts
12.50 UTC 03-June Asset of the Day: Indices Insights
19.30 UTC 04-June Daily FX Recap and Looking Forward
10.00 UTC 05-June Supply & Demand – Approach to Trading

Key Economic Events

Watch out for the biggest events on the economic calendar this week:

01.45 UTC 01-Jun China Caixin Manufacturing PMI
14.00 UTC 01-Jun US ISM Manufacturing PMI
01.30 UTC 02-Jun Australia Company Operating Profits (Q/Q)
05.30 UTC 02-Jun RBA Interest Rate Decision
07.15 – 08.00 UTC 02-Jun Eurozone Member State Finalised Manufacturing PMIs
08.30 UTC 02-Jun UK Finalised Manufacturing PMI
01.30 UTC 03-Jun Australia GDP (Q/Q)
01.45 UTC 03-Jun China Caixin Services PMI
07.15 – 08.00 UTC 03-Jun Eurozone Member State Finalised Services PMIs
08.30 UTC 03-Jun UK Finalised Services PMI
14.00 UTC 03-Jun Bank of Canada Interest Rate Decision
14.00 UTC 03-Jun US ISM Non-Manufacturing PMI
14.30 UTC 03-Jun US EIA Crude Oil Inventories
01.30 UTC 04-Jun Australia Retail Sales / Trade Balance
09.00 UTC 04-Jun Eurozone Retail Sales
11.45 UTC 04-Jun ECB Interest Rate Decision
12.30 UTC 04-Jun ECB Press Conference
14.30 UTC 04-Jun US EIA Natural Gas Storage
06.00 UTC 05-Jun Germany Factory Orders
12.30 UTC 05-Jun US Nonfarm Payrolls

FX update: Pound blown off course by Frosty Brexit talks, euro tests 200-day line

Forex

Sterling got a smack and the euro pulled back from its highs of the day as Britain’s chief Brexit negotiator confirmed what we already knew; that UK-EU talks are not going very well at all. Whilst a classic last-minute EU fudge is still broadly anticipated by the market, the language from David Frost was not optimistic.

GBPUSD moved sharply off the 1.23 handle, turning lower to test 1.2250 before paring those losses. EURGBP pushed higher and looked towards the May 21st swing high at 0.90, a two-month peak. Undoubtedly sterling becomes increasingly exposed to headline risks around Brexit as we move out of the worst of the Covid-19 pandemic and back into the cut-and-thrust of negotiations.

Speaking to MPs, Frost said the EU’s current mandate handed to chief negotiator Michel Barnier is – in certain key areas –  not likely to produce an agreement, adding that the EU must change its stance in order to reach a deal with the UK. He said that the policy enshrined in the EU’s mandate is not one that can be agreed by the UK. Interesting to see sterling come back a touch as Mr Frost said it’s still the early stages of talks and the UK is still setting out its position – this seems rather optimistic given the timelines previously mentioned.

Whilst we knew that there had been precious little progress in the latest round of talks, the language indicates the two sides are very far apart still. We should however note that adopting this tone is part of the game – the UK’s position remains to take a hard line and, with Mr Cummings still in place, I would think this will remain the case. When questioned, Mr Frost said he reports to the PM, not to Mr Cummings. Of course, we all know where the real power lies.

As previously noted time is running out fast for the talks and we become less sure that either side has the political will and capital to expend on this when dealing with the economic catastrophe of the pandemic. The EU focus is on sorting out a rescue fund that all members can sign up to. Political capital is being spent on that more readily.

Chatter around the Bank of England looking at negative rates is another weight on sterling right now. Indeed it’s a crossroads moment as we deal with a massive increase in government debt, run huge twin deficits and exit the EU whilst in the midst of the worst global recession since the 1930s. There are a lot of downside risks for GBP.

Chart: Pound under pressure: EURGBP moves up to test near-term resistance, GBPUSD drops sharply

Meanwhile, EURUSD also pulled back from its highs, before recovering the 1.10 handle. The euro had earlier moved higher and European equities extended gains after the European Commission laid out plans for an additional €750bn stimulus fund. Ursula von der Leyen set out plans to distribute €500bn in grants – as per the Franco-German proposals – with an additional €250bn in loans on top. She said this would take the EU’s total recovery fund to €2.4 trillion.

A German government spokesman said Berlin was happy the EU had taken up elements of the plans set out last week by Angela Merkel and Emmanuel Macron. Macron urged the EU to move forward quickly. But a Dutch official said budget talks would ‘take time’, indicating a still rather frosty approach to the rescue fund from certain corners – it’s far from a done deal.

Chart: EURUSD analysis

The EC plans took the cross through the 200-day simple moving average around 1.1010 but there was not an immediate follow-through and the Brexit chatter knocked it back before it retook the 200-day line. Bulls need to see a confirmed push above this to unlock the path back to 1.1150, the March swing high. Failure calls for retest of recent swing lows at 1.0880.

Macron and Merkel’s rescue fund: Europe’s Hamiltonian moment?

Forex

Germany and France have agreed to push for a €500bn EU fund to help member states combat the economic fallout of Covid-19. The proposal comes as EU leaders fail to reach a consensus over what form a rescue package should take.

Angela Merkel and Emmanuel Macron have backed the scheme to support the Eurozone economy, which would be in the form of grants not loans.

The stimulus will be funded by the European Commission borrowing money – ‘coronabonds’ in all but name. The EC could borrow money from capital markets on behalf of all EU nations, secured against the next seven-year budget. The debt would mature after 2027.

This is an important breakthrough for the EU and has been dubbed Europe’s ‘Hamiltonian’ moment, in reference to Alexander Hamilton, who federalised the debts of the various US states in 1790.

This week on Wednesday EU President Ursula von der Leyen will present her plans, which will build on the Franco-German proposal.

If the budget talks are successful it should lower risk premia on EU sovereign debt, lowering bond yields and offering succour to the euro as well as to European equity markets.

It would also mark a major step towards EU fiscal policy coordination and possible fiscal union.

Will Eurozone members agree to rescue grants?

But it needs consensus and agreement from all the members of the common currency. Leaders struggled to agree an emergency funding package back in April, and the issue of how to support the recovery once the health crisis had passed was left alone.

Some nations have argued that making any rescue funding into a loan means saddling more debt on member states, like Italy and Spain, that are already struggling with their existing liabilities.

The ‘frugal four’ – Austria, Denmark, the Netherlands, and Sweden – are not playing ball with the French and Germans, putting forward a counterproposal to the €500bn bailout fund.

The four countries said they would not agree to a mutualization of debt, nor an increase in the EU budget.

Budget talks over the next few weeks will be crucial to the Eurozone and its economy.

For more, follow Helen Thomas from BlondeMoney here on XRay for weekly video updates and sign up for bespoke research analysis on how EU politics is driving financial markets.

Euro wobbles ahead of German court ruling, risk appetite improves

Morning Note

Attention this morning was on the German constitutional court and its ruling on the ECB’s long-standing bond buying programme. This could limit the amount of bonds the Bundesbank can buy, potentially creating a rift with the ECB and other member states. The real concern is whether it could affect the €750bn Pandemic Emergency Purchase Programme (PEPP), which has much looser rules than other QE programmes.

 

It’s high stakes – if the court blocks the Bundesbank from participating in QE it would be curtains for the ECB and creates significant Eurozone breakup risks. The good news is that the judges probably realise this. High stakes but the risk of serious ructions appears low.  The European Court of Justice has already ruled in favour of the ECB’s bond buying, so it’s hoped the German court will not rock the boat at this critical moment.

 

EURUSD was lower, breaking down at the 1.09 support having failed to sustain the move above 1.10 last week, which could open move back to around 1.0810. The euro seems to be displaying some degree of stress this morning ahead of the German court ruling. 

 

European markets rose after Asian equities made some gains. Markets in Japan, South Korea and China were shut for a holiday, but Hong Kong and Sydney rose. Wall Street closed a little higher after bulls pushed the S&P 500 into positive territory only in the final hour of trading yesterday. There is a little more risk appetite as oil prices climb. 

 

The Reserve Bank of Australia left rates on hold at the record low 0.25% and seems to be well dug in here. The RBA won’t go negative and won’t hike until the Covid-19 crisis is well in the rear view mirror. This is a pattern being repeated by most major central banks. 

 

Oil continues to make steady gains with front month WTI to $22 on hopes lockdowns are being lifted. The idea that we will be moving around anything like as much as before is fanciful, at least in the near term. New Zealand is going to be shut to foreigners – except perhaps their pan-Tasman pals – for a long time to come, the prime minister says. Ryanair has reported passenger numbers in April fell 99.6% and sees minimal traffic in May and June. Carnival is getting cruises going again – tentatively – in August. New car registrations in the UK collapsed in April, falling 97% to just 4,000 vehicles.

API data later today could show a very small build in inventories, but as always we prefer to look at tomorrow’s EIA figures. A small build would give more hope to oil bulls that the glut is not as bad as feared, however I would caution that we are simply seeing inventories naturally build more slowly as we approach tank tops.

Chart: EURUSD wobbles

Stocks head lower after Gilead, EU disappointments

Morning Note

US stocks faded and European equity markets are broadly weaker following on reports Gilead’s Remdesivir drug isn’t what it was cracked up to be. It had been indications of early positive results for treating Covid-19 patients with the drug that sent markets up at the tail end of last week. We should note these are all leaked reports and the data is sketchy at best. What it shows is how the market is prepared to read into positive vaccine or anti-viral news with extreme optimism, setting the bar high for disappointment.

Data on the economy isn’t offering any disappointment – the bar is already so low that nothing can really be really upsetting. US initial jobless claims rose by more than 4m again, taking total unemployment claims to 26m from Covid-19. UK retail sales fell by a record 5.1% in March, but a drop of this magnitude was widely anticipated. Consumer confidence didn’t decline, but held steady at an 11-year low at -34.

Stimulus is being worked out. The US House of Representatives on Thursday approved the $484bn package for small businesses and hospitals.  More will be needed, you feel. Today’s data of note is the US durable goods orders, which are seen falling 12%, with the important core reading down 6%.

In Europe, Angela Merkel made sure Germany’s economic weight will stand behind a €1tn package for the Eurozone to prevent weaker economies from recovering a lot more slowly than richer ones. This will be defining moment for the EU – if it cannot pull together now, what is the point of it? Of course, there are still strong differences between nations on the actual size and nature of the fund. Critically, we don’t know whether cash will be dispensed as loans or grants. There was a definite sense from Thursday’s meeting of the EU kicking the can down the road. The problem for the EU and the euro is that we’re heading towards a world debt monetization and it cannot take part. German and Italian spreads widened.  Support needs to be agred – Lufthansa today says it will run out cash in weeks.

The euro continues to come under pressure on the disappointment and yesterday’s PMI horror show. Support at the early Apr lows around 1.07750 was tested as I suggested in yesterday’s note, which could open up a move back to 1.0640 without much support in the way.

Heading into the final day of trading for the week, the UK was outperforming – the Dow down 3% this week, while the FTSE was about 0.7% higher. The FTSE 100 shed about 100 points though in early trade Friday to give up its 5800 handle and head for a weekly loss.

Overall, it’s been a pretty indecisive week for indices with no significant developments in terms of the virus or economic data. It’s interesting that in terms of earnings releases, we are not seeing much other than a huge amount of uncertainty as companies scrap guidance. American Express is the main large cap reporting today. It’s already warned that Covid-19 would hit payments as lockdown measures force people to stay home. The momentum of the rally from the trough has faded this week and could see stocks roll over next week if there no more good news. It’s either a bullish flag pause, or a roll over to be signalled by a MACD bearish crossover. The question is do you think stocks should be down 10% or 20% from the all-time highs?

DAX: momentum fading

S&P 500: 50-day SMA proves the resistance with 2800. Watch the MACD.

Oil is proving to be more stable. Oklahoma’s energy regulator has said producers can close wells without losing their licences. Donald Trump started to look desperate, stoking tensions with Iran. You would not be surprised if it were a dastardly plan to boost oil prices. Treasury Secretary Mnuchin suggested the White House was looking at a bailout for the oil industry.

Today’s Baker Hughes rig count will be closely watched to see how much production is being shut in. Last week’s figures showed the sharpest decline in active rigs for 5 years, falling 66 to 438, around half the number drilling for oil the same time a year ago.

CySEC (EU)

  • Client’s funds are kept in segregated bank accounts
  • FSCS Investor Compensation up to EUR20,000
  • Negative Balance Protection

Products

  • CFD
  • Share Dealing
  • Strategy Builder

Markets.com, operated by Safecap Investments Limited (“Safecap”) Regulated by CySEC under licence no. 092/08 and FSCA under licence no. 43906.

FSC (GLOBAL)

  • Clients’ funds kept in segregated bank accounts
  • Electronic Verification
  • Negative Balance Protection

Products

  • CFD
  • Strategy Builder

Markets.com, operated by TradeTech Markets (BVI) Limited (“TTMBVI”) Regulated by the BVI Financial Services Commission (‘FSC’) under licence no. SIBA/L/14/1067.

FCA (UK)

  • Client’s funds are kept in segregated bank accounts
  • FSCS Investor Compensation up to GBP85,000
    *depending on criteria and eligibility
  • Negative Balance Protection

Products

  • CFD
  • Spread Bets
  • Strategy Builder

Markets.com operated by TradeTech Alpha Limited (“TTA”) Regulated by the Financial Conduct Authority (“FCA”) under licence number 607305.

ASIC (AU)

  • Clients’ funds kept in segregated bank accounts
  • Electronic Verification
  • Negative Balance Protection

Products

  • CFD

Markets.com, operated by Tradetech Markets (Australia) Pty Limited (‘TTMAU”) Holds Australian Financial Services Licence no. 424008 and is regulated in the provision of financial services by the Australian Securities and Investments Commission (“ASIC”).

FSCA (ZA)

  • Clients’ funds kept in segregated bank accounts
  • Negative Balance Protection

Products

  • CFD
  • Strategy Builder

Markets.com, operated by TradeTech Markets (South Africa) (Pty) Limited (“TTMSA”) Regulated by Financial Sector Conduct Authority (‘FSCA’) under the licence no. 46860.

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