Having set new records on the bleep-test earlier this week, equity markets, in particular, appear to be taking a longer cardiovascular recovery today. The consolidative price action of recent gains continuing overnight. Asia continued taking an extended active recovery, ahead of the US non-farm payrolls data and the coming weekend. Equities are mostly sideways to slightly lower this morning.
Most of the attention appeared to be in currency markets. The ECB announced its intention to nearly double its bond-buying target to EUR 1.35 trillion, to support the bloc’s recovery. The shelving of the big bazooka for a howitzer had little effect on eurozone equities, but was enough to propel the euro to three-month highs against the US dollar. Indeed, the rotation out of US dollar generally continued unabated overnight, with the dollar index sinking another 0.52% to 96.78.
US initial jobless claims disappointed yesterday, printing at 2.126 million Americans joining the unemployment queues versus an expected 1.8 million. The back month was revised to a more negative figure. That wasn’t enough to take the heat out of stock markets or energy though, with equities supported by news that American Airlines (NASDAQ:AAL) was sharply increasing flights. That led to a strong outperformance by the aviation sector.
Today’s non-farm payrolls report will likely disappoint following the jobless claims data. We expect non-farm payrolls to shrink by 8.8 million jobs, – vastly better in a perverse market-driven way, – than last month’s -20.5 million jobs. The unemployment rate is likely to rise to 19.50%, and I note that the New York Fed’s GDP Nowcast is continuing to trend lower for Q2, hitting -35.53% yesterday. None of this is unlikely to derail the buy everything recovery rally though, unless the data blows out negatively to an enormous degree.
China delivers another Sunday special data series this weekend, with the release of its balance of trade for May. The headline number is forecast to shrink to a $39 billion surplus. Exports are expected to shrink by 7.0%, but it is the imports number that will be of more interest to the region. Imports are forecast to fall by 9.70%. If imports fall less than expected, that should give Asian markets a boost on Monday, as that will fit in nicely with the market’s global recovery narrative.
EQUITIES EASE GENTLY ACROSS ASIA AS INVESTORS REDUCE WEEKEND RISK
Wall Street followed Asia and Europe, continuing to lock in profits after an impressive rally in the first part of the week. The S&P 500 fell 0.35%, the NASDAQ dropped 0.69%, but the Dow Jones eked out a 0.04% gain, boosted by airlines. Something you don’t hear too often in 2020.
The S&P has tested and failed ahead of resistance between 3130.00 and 3135.00 this week. The dips, however, remain shallow and the price action consolidative, not corrective. Only a fall below 3000.00 invalidates the bullish technical picture. I note that the NASDAQ has now risen by some 47% from its mid-March lows. I am not alone in my sense of disbelief, or my reluctance to fully embrace the greatest comeback ever. Perhaps even greater than the Eagle’s "Hell Freezes Over" album? The fact though so many investors share my doubts, is one of the primary reasons that equity markets will continue to be illogically unreasonable. Engagement in the stock rally is nowhere near 100%.
Asia has been mostly gently lower as investors take money off the table ahead of the weekend. The Nikkei 225 has slipped 0.20%, although the Korean KOSPI has gained 0.50%. Mainland China sees the Shanghai Composite and CSI 300 both flat for the session along with Hong Kong. Singapore’s Straits Times has climbed 0.50% as local investors price in further domestic recovery as its lockdown tapers. Meanwhile, Australia has followed Wall Street, the ASX 200 and All Ordinaries easing 0.30%.
US DOLLAR FALLS AGAIN
The rotation out of US dollars continued apace, with currency markets shrugging of corrective price action elsewhere. The global recovery momentum took a while to seep into currency markets, but now looks well entrenched. Asian markets though, have a definite Friday look about them, being almost unchanged across the board.
The big winner overnight was the euro as the ECB vastly increased its bond-buying programme to support growth. The EUR/USD jumped 0.95% to 1.1335 after the ECB announcement, a three-month high. Realistically, EUR/USD is now set to retest 1.1500 sooner, rather than later.
The commodity currencies have paused for breath over the past two sessions, having led the rallies aggressively much sooner than other majors. USD/CAD has consolidated at 1.3500 overnight and looks set to test its 200-day moving average (DMA) at 1.3465, by early next week. The AUD/USD has tested and stalled ahead of 0.7000, but its pullbacks are shallow, suggesting it is merely in active recovery-mode before pushing higher. The 0.7100 region remains the initial target after 0.7000, with only a fall through 0.6800 now muddying the technical picture.
In Asia, the Singapore dollar continues to strengthen with USD/SGD trading at 1.3980 today. Below 1.3950 opens further US dollar loss to 1.3850, its 200-DMA. The Chinese yuan also fixed stronger this morning at 7.0965 versus the US dollar. Further gains to 7.0450 cannot be ruled out as trade tensions drop off the front pages for now.
Overall, the weakness in the US dollar looks set to continue as lagging currency markets fully embrace the post-COVID-19 global recovery narrative.
OIL CONSOLIDATES AS OPEC+ LOOKS SET TO EXTEND CUTS FOR ANOTHER MONTH
Oil had another quiet session overnight, with both Brent crude and WTI almost unchanged as traders awaited more visibility from OPEC+. Brent crude was virtually unchanged at $39.65 a barrel. WTI fell slightly to $37.25 a barrel and has eased somewhat to $37.00 a barrel.
In times past, vacillating by OPEC+ would have seen much more aggressive downward corrections by oil. That has not happened this time, implying that oil markets are confident and comfortable with prices at these levels. Notably, Brent crude could still fill its $40.00 to $45.00 price gap next week if we close above $40.00 a barrel later today.
As it stands, various media outlets are reporting that OPEC+ is likely to meet this weekend, with Saudi Arabia and Russia having sorted out non-compliance issues with Iraq, Nigeria and Kazakhstan. Indications suggest both have agreed to extend the headline cuts by another month until the end of July. That should be bullish for prices in this environment; however, oil markets appear to be waiting for official confirmation from OPEC+ itself, and not media speculation.
GOLD REMAINS MAROONED IN NO-MANS-LAND WITH A NEGATIVE OUTLOOK
Gold gained a reprieve overnight, as a falling US dollar and easing equity prices lent support to the foundering precious metal. Gold rose by 0.95% to $1714.35 an ounce, although the honeymoon appears to be quickly over in Asia, where gold has fallen back to $1709.00 an ounce.
The bounce overnight was entirely driven by the price action in other markets. It appears to have a decidedly dead-cat bounce feel to it, in market parlance. The balance of probabilities is still suggesting that more downside pain remains for long-gold positioning, possibly meaningfully so.
Gold has resistance at $1725.00 an ounce today, with support at $1698.00 an ounce, its 50-DMA. A move below this level will likely see some stop-loss sellers emerge.