19-May-2020

1) Dollar Ends Lower, Euro Rises on Franco-German Proposal
2) GBP/USD Recovery from Multi-Week Low Runs the Risk of Fizzling Out Quickly
3) European Stocks Hold Onto Gains as UK Jobless Claims Hit Record High

 

 

1) Dollar Ends Lower, Euro Rises on Franco-German Proposal

The greenback ended the day lower against majority of its peers, except for safe-haven Japanese yen on Monday due to a possible coroanvirus treatment as well as optimism about reopening economies which boosted risk appetite together with a rally in U.S. stocks and yields. (Dow Jones ended the day higher by 3.85% or 911 points). Euro rallied across the board in New York after ambitious Franco-German proposal.

Reuters reported Moderna Inc said on Monday its experimental vaccine for COVID-19 showed promise in early trials and it looks to advance the vaccine into late-stage trials in July.    The vaccine, mRNA-1273, was also found to be generally safe and well tolerated in the early-stage study, the drug developer said.

Versus the Japanese yen, although dollar gained to 107.28 in New Zealand, price retreated to 107.08 in Asian morning. The pair then found renewed buying there and ratcheted higher to 107.31 in European morning, then to session highs at 107.50 in New York morning on rising U.S. stocks and yields before retreating to 107.21 on profit-taking and then swung sideways.

The single currency traded with a firm bias in Asia and gained to 1.0828 at European open before dropping to session lows at 1.0801. However, the pair then erased its losses and jumped to a 12-day high at 1.0926 in New York on Franco/German proposal announcement together with improved risk appetite.

Reuters reported France and Germany proposed on Monday a 500 billion euro ($543 billion) Recovery Fund that would offer grants to European Union regions and sectors hit hardest by the coronavirus pandemic, pushing up the euro and bringing down Italian bond yields.     The two biggest EU countries, whose agreements usually pave the way for broader EU deals, proposed that the European Commission borrow the money on behalf of the whole EU and spend it as an additional top-up to the 2021-2027 EU budget that is already close to 1 trillion euros over that period.

The British pound opened lower and dropped to a 7-week low at 1.2075 in New Zealand on negative Brexit news over the weekend. However, lack of follow-through selling triggered short-covering and price rebounded strongly to 1.2114 in Asian morning. Cable continued to ratchet higher in tandem with euro and rose to 1.2228 in New York on boosted risk appetite before weakening to 1.2175 on profit-taking and then moved narrowly.

Reuters reported British Cabinet Office minister Michael Gove said on Sunday that there was a trade deal to be done with the European Union but it would require compromise from the bloc.   Both sides on Friday called for the other to give ground in negotiations on a post-Brexit relationship after saying that the latest round of talks had ended with little progress being made.   Gove said issues such as fisheries and the so-called “level playing field” rules to ensure fair competition remained sticking points.   “We’re making it clear to the EU we can’t do a deal on those terms,” he told Sky News. “But I am confident that there is a deal to be done. It just requires a degree of flexibility on the EU side which I’m sure that they will appreciate they need to show.”

In other news, Reuters reported the Bank of England has not ruled out taking interest rates below zero at some point in future, one of its top officials said on Monday.   “The (Monetary Policy Committee) has not ruled out any policy tool,” interest rate-setter Silvana Tenreyro told a London School of Economics webinar.

Negative rates in other parts of Europe had helped economies, she added, adding that there would be specific considerations for Britain if such a policy were employed.

On the data front, Reuters reported confidence among U.S. single-family homebuilders rose in May, potentially signaling that the worst of the economic downturn was probably over as the country gradually reopens after lockdowns to slow the spread of the novel coronavirus.    The National Association of Home Builders/Wells Fargo Housing Market Index rose seven points to 37 this month after a record plunge in April. The closure of nonessential businesses in mid-March to limit the spread of COVID-19, the respiratory illness caused by the virus, led to record job losses in April and a collapse in manufacturing output and retail sales.

 

2) GBP/USD Recovery from Multi-Week Low Runs the Risk of Fizzling Out Quickly

The GBP/USD pair staged a solid intraday recovery from multi-week lows and rallied around 150 pips on the first day of a new trading week. A broad-based US dollar weakness turned out to be one of the key factors that prompted some aggressive short-covering move around the major. The global risk sentiment got a strong boost on Monday after the US drugmaker Moderna reported positive results for its potential COVID-19 vaccine. The upbeat market mood was evident from a strong rally in the equity markets, which weighed heavily on the greenback’s safe-haven status.

However, a combination of factors kept a lid on any runaway rally for the major. The BoE Chief Economist Andrew Haldane, in an interview with the Telegraph over the weekend, indicated the possibilities of negative interest rates. This comes on the back of the lack of progress in the Brexit negotiations, which held investors from placing any aggressive bullish bets around the sterling. Nevertheless, the pair ended the day with strong gains and gained some follow-through traction during the Asian session on Tuesday.

Meanwhile, the pair had a rather muted reaction to the latest UK employment details, which showed that the number of people claiming unemployment-related benefits increased 856.5K in April as compared to +150K anticipated. The weaker reading, to a larger extend, was negated by an unexpected dip in the unemployment rate and did little to provide any meaningful impetus. In fact, the official jobless rate came in at 3.9% as against a rise to 4.4% expected, from 4.0% previous.

With Tuesday’s key UK macro data out of the way, market participants now look forward to the release of US housing market data for a fresh impetus. In the meantime, the broader market risk sentiment might influence the USD price dynamics. This coupled with any fresh Brexit-related headlines might produce some meaningful trading opportunities.

From a technical perspective, the overnight strong recovery move did little to alter the pair’s near-term bearish outlook. Hence, any subsequent positive move is likely to confront a stiff resistance near the double-top neckline support breakpoint, currently around the 1.2270-80 region. This is closely followed by the 1.2300 round-figure mark, above which the pair could extend the recovery further towards the 1.2340-45 supply zone.

On the flip side, the 1.2200 mark now seems to protect the immediate downside, which if broken decisively, might be seen as a fresh trigger for bearish traders. A subsequent slide below the 1.2180-75 region will reinforce the negative outlook and turn the pair vulnerable to accelerate the fall further towards the 1.2100 round-figure mark. Some follow-through selling, leading to break through the overnight swing low near the 1.2075 now seems to set the stage for a further near-term depreciating move for the major.

 

3) European Stocks Hold Onto Gains as UK Jobless Claims Hit Record High

After a really strong session yesterday which saw US markets post their best gains since the beginning of April, stock markets in Europe look set to build on those gains further today.

Asia markets enjoyed a similarly strong session, on rising optimism that we could well see a viable vaccine come from the various trials that are currently taking place across the world, while countries take baby steps out of various states of lockdown.

With Fed chair Jerome Powell equally insistent that the Federal Reserve has the capacity to go even further in terms of supporting the US economy in comments made at the weekend, investors will be looking to the Fed chairs testimony to US lawmakers this afternoon to reinforce that confidence.

Investors are also taking comfort from a new EU recovery fund worth €500bn which was announced by German chancellor Angela Merkel and French President Emmanuel Macron yesterday, and would envisage the EU Commission raising money on bond markets, which would then come out of the EU budget in the form of grants to be paid to the most badly virus affected European economies.

This remains far from the done deal that a lot of people think it is, as it will still need to be funded and agreed by all 27 EU member states, which as we know can be akin to herding cats, but it is at least an acknowledgement that there is a requirement for some action, that doesn’t add to the overall debt load of countries like Spain and Italy. The fund does come with conditions in respect of structural reform, and that could be problematic given that Italy in particular has shown itself completely unable to address the weaknesses in its economy, which have created this problem.

This still remains well short of so called a mutual bond or shared burden, and is intended very much as a one-off which means that it may not go anywhere near far enough when other countries are throwing much higher sums at the problem.

In any case European markets have started the day very much on the front foot, as they look to build on yesterday’s gains; however the real test of this week’s stock market strength is still to come as we close in on the highs we saw in April. To build confidence that this rally has legs, and is not another trap for the bulls, we need to see the FTSE100 break above the 30th April highs of 6,151, and the German DAX peak of 11,235. Thus far we still remain short of those key levels.

This morning’s UK data was every bit as bad as it was expected to be as monthly jobless claims for April rose above estimates to a record 856.5k, up from 12.2k in March, and would have been much higher, but for the governments furlough scheme which has seen over 7m people temporarily go on the payroll of the state.

The fact that we know this shows that the jobless claims numbers as they currently are have the potential to go much higher in the coming months. On a quarterly basis output hour also collapsed, declining 2.9% in Q1, compared to the year before, no doubt as a result of the slowdown in March which eventually resulted in the economy being locked down in the last week of the quarter. It also means that Q2 is likely to see an even bigger fall.

At around the same time the UK government published its latest tariff regime for the post Brexit economy with a plan for around £30bn worth of tariff cuts. This includes keeping tariffs on agricultural products including beef, and maintaining a 10% tariff on cars.

The pound has held up fairly well in spite of the data, and further central bank commentary, this time from MPC member Silvia Tenreyro who was quoted as saying that negative rates had had positive effects in the euro area.  This seems an extraordinary statement given the damage the policy has caused to the European banking sector over the past few years. Whatever it is they are putting in the coffee over at Threadneedle Street, it must be really strong.

European car sales also saw another horror show in April with a record decline of 76.3%, an even bigger decline from the 55.3% in March.

In company news Imperial Brands announced their latest half year numbers for 2020, which while in line with expectations, has seen management decide to reduce the dividend, sending the shares lower in early trade.

Operating profits showed a decline of 19.6% to £925m, largely as a result of costs associated with the sale of the Premium Cigar Division, a goodwill impairment, and higher restructuring costs.

Total revenues were slightly higher, as the company slightly increased its market share. The company said that Covid-19 has had minimal impact thus far on the overall business, but this was expected to change in the second half of the year, and as such management have decided to reduce the dividend, in order to accelerate debt reduction and strengthen the balance sheet.

Chilean copper miner Antofagasta announced that it was revising its recommendation over its final dividend, as a result of rising Covid-19 cases in Chile, and the quarantine imposed by the Chilean government over much of Santiago. The decision has been taken to reduce its final dividend of 7.1p a share.

Airline and travel stocks have picked up where they left off yesterday with more strong gains this morning with British Airways owner IAG having another good session, it is up 20% this week already, followed by Easyjet which is also up over 20% since last Thursday.

With equity markets in Asia and Europe getting caught up in all this exuberance US markets are still looking at a positive open, however they could well find their progress tempered by similar upside barriers, as they look to retest their previous peaks as well as the 200-day MA, which has tempered previous rebounds.

Moderna’s vaccine may well be yielding positive results, amongst many others, but it still remains well short of a viable large-scale solution, and as such any setbacks on the vaccine front could see recent stock market gains start to unravel.

On the earnings front we’ll also get to hear from Walmart, one of the few US retailers able to take on Amazon. Walmart saw its shares hit record highs in April, before slipping back a touch, though it is still close to the levels it closed at towards the end of 2019. It has proved to be remarkably resilient to the disruption caused by the spread of coronavirus, with its Mexico unit seeing a 15.4% rise in its first quarter profits, at the end of April. As one of the US’s biggest retailers it is likely to have been hit by the various shutdowns seen across its store real estate, and while its on-line operations are on a par with Amazon, its profit margins are much thinner. Furthermore, staff costs are likely to be higher due to sickness, as we’ve seen from similar retailers that have performed well due to their positions as grocery retailers, as well as general retailers. Profits are expected to come in at $1.158c a share.