28-May-2020

1) GBP/USD: Bears Looking To Seize Control amid Brexit Worries, US-China Tensions
2) SP500 Consolidates Past 3000 Ahead Of US GDP Data
3) EU Commission Proposes an Ambitious Recovery Plan

1) GBP/USD: Bears Looking To Seize Control amid Brexit Worries, US-China Tensions

The GBP/USD pair came under some fresh selling pressure on Wednesday and eroded a major part of the previous day’s goodish intraday positive move to two-week tops. The UK PM spokesman reiterated government’s position and said that the Brexit transition period will not be extended beyond December 31. The comments overshadowed the overnight report that the EU is willing to drop its ‘maximalist’ approach on fisheries in the next round of Brexit negotiations, starting next week, and took its toll on the sterling.

This comes amid concerns about worsening US-China relations, which benefitted the US dollar’s relative safe-haven status against its British counterpart. This, in turn, contributed to the pair’s sharp intraday fall of around 150 pips. Diplomatic tensions between the world’s two largest economies escalated further after the US Secretary of State Mike Pompeo declared that Hong Kong to be no longer autonomous from China and does not warrant special treatment under the US law. The latest development fueled worries over the standoff between the US and China, which could have large ramifications for the global economy.

However, the optimism over a potential COVID-19 vaccine remained supportive of the upbeat market mood, which kept a lid on any runaway rally for the greenback and helped limit deeper losses. The pair managed to find decent support near the 1.2200 mark and settled over 50 pips off daily lows. The pair built on the overnight bounce and gained some follow-through traction during the Asian session on Thursday. The pair was last seen hovering around the 1.2275 region and remains at the mercy of the USD price dynamics amid absent relevant market moving economic releases from the UK.

Later during the early North American session, investors will look forward to a slew of important US macro data for some meaningful trading impetus. Thursday’s US economic docket highlights the release of the second estimate of Q1 GDP, Durable Goods Orders for April and the Initial Weekly Jobless Claims.

From a technical perspective, the pair on Wednesday faced rejection near an important confluence resistance comprising of 50% Fibonacci level of the 1.2644-1.2076 fall and 200-period SMA on the 4-hourly chart. Bulls, however, managed to defend 23.6% Fibo. level support near the 1.2200 mark, which should now act as a key pivotal point for the pair’s next leg of a directional move. A convincing breakthrough the mentioned level, leading to a subsequent weakness below the 1.2180-70 horizontal support, might be seen as a fresh trigger for bearish traders. The pair might then accelerate the fall back towards the 1.2100 mark en-route multi-week lows, around the 1.2075 region.

On the flip side, Immediate resistance is pegged near the 1.2295-1.2300 area (38.2% Fibo. level), above which the pair is likely to make a fresh attempt to retest the 1.2360-65 confluence hurdle. Some follow-through buying now seems to open the room for additional gains and has the potential to lift the pair further towards reclaiming the 1.2400 round-figure mark. The momentum could further get extended towards the 1.2430-40 supply zone, which coincides with 61.8% Fibo. level.

2) SP500 Consolidates Past 3000 Ahead Of US GDP Data

US equities remained resilient to escalating US-China tensions, but trading was mixed in Asia.

The Nikkei (+1.00%) and ASX (+1.40%) extended gains, while Shanghai’s Composite (-0.35%) and Hang Seng (-1.82%) slid for the second day as Hong Kong’s special status came under scrutiny amid passing a new national security law that restricts rights and freedoms of its citizens. Further reviving worries was the US House vote to allow sanctions on Chinese leaders for human right abuses. Now there is a rising risk for a tit-for-tat reaction from Beijing, which could further hinder the trade relationship between the two countries.

Meanwhile, coronavirus death toll hit 100’000 in the US. Officials and investors keep their expectations high for the discovery of a magic vaccine before the end of the year, but the only thing they can rely on for now is the stable decline of new cases and the absence of signs of a second wave of contagion.

The SP500 is now consolidating gains above the critical 3000 mark, at twelve-week highs. The current levels will be a make or break for investors. If the market eagerness to carry the recovery higher is stronger than the temptation of realizing profits, we could see the SP500 targeting the pre-Covid levels – which is strange per se knowing how bad the businesses were impacted by the Covid shutdown. But this precisely is the charm of the Federal Reserve (Fed) intervention. The massive asset purchases and near zero rates are clearly doing the trick. The S&P500 already recovered nearly 70% of Covid-led losses and the cheap liquidity environment gives a solid base for more recovery across the financial markets. In this respect, the asset prices are, and should continue diverging from their underlying valuations, however the market forces in place will remain favourable of a persistent rise in prices in the long run.

US futures are up except Nasdaq, while activity in FTSE (+1.05%) and DAX (+1.26%) futures hint at further gains in Europe on Thursday.

With the mix of unpromising international and economic news, however, the momentum is what risk investors rely on before the announcement of the US GDP data. A consensus of analyst expectations points at a 4.8% contraction in the first quarter, but risks are tilted to the downside.

The US dollar is weaker across the board on the back of a resilient risk appetite, but a worse than expected US GDP read could change the appetite for dollar. Demand in other safe haven assets, such as US treasuries and gold, remains solid.

3) EU Commission Proposes an Ambitious Recovery Plan

On the Swedish agenda we have retail sales for the month of April and NIER’s monthly economic tendency survey. For the latter, we expect a modest rebound, however from very low levels.

In Europe, we get DG ECFIN confidence indicators for May. Most confidence indicators released so far have increased slightly in May but remain at very low levels.

In the US, we get preliminary data for core capex orders in April, which most likely looked terrible like the rest of the economic indicators for April. US jobless claims will also be in focus.

We do not expect any rate changes from the Polish central bank, when they conclude their policy meeting today.

Otherwise, the focus is on politics, not least the negotiations on the EU recovery fund, which will now begin officially after the proposal released by the EU commission yesterday. Also keep an eye on the increasing US-China tensions and Brexit, where headlines are suggesting things are moving in the wrong direction.

Global risk sentiment and equity markets continue to be on a strong footing despite the tensions building between the US and China. Yesterday, the S&P 500 climbed to a 12- week high, while Asian stock markets are also seeing solid gains this morning. US and European futures are pointing to increases in their upcoming sessions. Bolstering the positive sentiment is a sense that the opening up of the global economy is proceeding well without seeing a major resurgence in new virus waves and economic activity is fast catching up. Yesterday, Australian central bank governor Phillip Lowe said that the Australian economy was recovering better than expected, tracking between the bank’s baseline and upside scenario outlined this month, but also warned about scaling back fiscal and monetary support prematurely.

Furthermore, policymakers continue to take steps to aid the economy. Yesterday, the EC commission announced its plan on a European recovery fund. In general the proposal exceeded market expectations as it envisages EUR250bn in loans on top of EUR500bn in grants, which were originally included in the German-Franco proposal last week. EU: A landmark for European history? Overall, we believe the recovery fund proposal is a strong signal from the Commission and European leaders (if confirmed) of support for the European project. While the exact value of the grants is still difficult to assess (due to the repayment schedule being unknown), we remain cautiously optimistic on the periphery.

So far investors haven’t been frightened by the growing tensions between China and the US. Yesterday, the US Secretary of State said that the Trump administration could no longer certify Hong Kong’s political autonomy from China. This could open the door to options including visa restrictions, asset freezes and potential tariffs. The National People’s Congress in China is expected to pass the measure today according to Bloomberg news. The offshore yuan tested a record low yesterday amid fears of US actions.