US and European equities closed firmly higher on Monday, despite rising anxieties about the GDP data due later this week.
Stocks in Asia traded mixed. The Nikkei (-0.28%) and the ASX 200 (-0.50%) retreated, while Shanghai’s Composite (+0.11%) and Hang Seng (+0.77%) recorded moderate gains.
FTSE (+0.17%) and DAX (+0.33%) futures hint at a modest positive start in Europe, while US futures point at losses in New York.
Energy stocks will likely hand back yesterday’s gains following a 25% slump in WTI crude amid the US Oil Fund suddenly moved from June to July 2020 - June 2021 contracts, due to limits imposed by regulators and its broker. WTI crude traded at $10 a barrel, and downside risks prevail. One big problem with oil is that no one wants or needs it now. Therefore, at the end of each month contract, we could see major price swings to the downside as investors will liquidate their positions to avoid physical delivery. And we know that the oil price could fall to deeper negative levels than we have seen with May contacts; there are rumours that a slump to $100 a barrel is possible. Under these circumstances, the medium to long term investors are nowhere to be found. Hence, the oil market is left in the hands of short-term traders, and the price volatility is here to stay with a clear positive skew to the downside.
In the currencies market, the US dollar index strengthened a touch above the 100 mark on the back of fading global risk appetite.
The two-day Federal Reserve (Fed) meeting starts today. The Fed is expected to stay pat at this month’s meeting, as it has already slashed interest rates to zero to give the necessary support to its coronavirus-hit economy, and done all it could to maintain a smooth liquidity in the short-term money markets.
On the data side, investors will be watching the US consumer confidence index which is expected to have smashed to 90 from 120 printed a month earlier, the goods trade balance and retail, wholesale inventories in March, and finally the Richmond manufacturing index in April. Soft economic data could spur the dovish Fed expectations – but will not shot down the US dollar, as there is little the Fed would do at this week’s meeting other than reiterating that they are ready to do more if needed. What investors really want to see is the first quarter GDP figures due before the Fed decision on Wednesday. We expect the US dollar to continue moving in relation with the global risk appetite rather than the Fed expectations. A deteriorating risk sentiment should continue translating into a stronger US dollar, while a risk-on market should lead to a softer greenback. Therefore, paradoxically, the softer the US data, the stronger the US dollar should be.
In Europe, the lack of clarity on the fiscal stimulus package has turned the investor attention to the European Central Bank (ECB) meeting, and rose speculations that the ECB could start buying junk bonds to give further support to zone’s businesses. The euro will likely remain under the pressure of the dovish ECB expectations in the run up to the meeting, though it is not sure that ECB will be keen on announcing any further measures for now. Short EUR/JPY could be an interesting play before the ECB decision for those betting on a softer euro, while leaving the US dollar which will be fighting its own battle, out of the scheme. Firm yen versus a fragile euro could pull the pair down to the 115 mark and below.
Meanwhile, the EURUSD is expected to bump into solid offers approaching the 1.09 handle.
Across the Channel, Boris Johnson’s return to office this week could give a shake to the pound, which, in the dearth of important economic data and events, would follow the dollar’s gyrations otherwise. We doubt that Boris Johnson has softened his Brexit position, as we heard many British officials insisting over the past weeks that the UK won’t accept a delay in the Brexit deadline. Hence, a firm statement on that end could bring the pound back under pressure. With looming downside risks for the pound, we expect to see decent offers near the 1.25 mark, and a solid resistance before 1.2730, the 200-day moving average.