Equities up, dollar down on resilient risk appetite on post-COVID crisis

Germany's manufacturing PMI

By Ipek Ozkardeskaya,

The trading week started on a mostly positive note, despite the growing tensions between the US and China, rising political unrest in the US following George Floyd’s death and mounting pressure from Facebook employees on company’s inaction faced with President Trump’s comments.

Data-wise, the May final manufacturing PMI figures from the most hit European nations came in better than expected on Monday, although the data was less promising in Germany, Japan and the US.

So far, investors remain focused on global business reopening, the fact that the number of new COVID cases remains stable as economies restart operating and of course, the massive fiscal and monetary support from central banks and governments.

The positive sentiment outweighs even a faltering phase-one deal between Beijing and Washington, as China decided to slow down the US farm product purchases amid Washington interfered with its ‘internal affairs’ over the new national security law in Hong Kong, which has cost the city its special status.

Energy and financials continue outpacing the positive market move — a sign that investors are betting on a further market recovery based on improved sentiment vis-à-vis the recovery post-COVID crisis.

US equity futures are marginally lower, with Nasdaq futures showing less vulnerability, however. FTSE (+0.52%) and DAX futures (+0.61%) hint at a positive start in Europe.

The US dollar is sold against most major currencies, although other safe haven assets including US treasuries, yen, Swiss franc and gold remain bid.

The yellow metal sees support near the $1,725 per oz, even though the buyers lose appetite approaching the $1,750 mark on uncertainty regarding a renewed risk sell-off despite unpromising news from the US, China front.

The EURUSD advanced to 1.1153 on Monday on the back of a broadly softer US dollar. Technically, a major Fibonacci resistance at 1.1160 (38.2% retracement on March debasement) shelters some short-term offers.

We could see a minor downside correction as the daily RSI index points at overbought market conditions. However, the strengthening positive momentum hints that the single currency could clear the 1.1160 offers and make a move towards 1.1200/1.1220, the 100-week moving average.

Likewise, Cable owes its recent strength to the global debasement in greenback. The GBPUSD traded above its 100-day moving average (1.2485) for the first time since March. But the sterling appetite will likely remain limited near, and above the 1.25 mark, as the fourth round of Brexit negotiations this week will likely be an unpleasant reminder of a heightened probability of a no-deal Brexit, as British politicians remain firm on their year-end deadline to leave the EU.

With too many unresolved issues and too little time to find an agreement, the UK will soon start preparing for a no-deal divorce, and sterling could start doing the same. As such, there is a significant downside potential in sterling if market starts pricing in the implications of a no-deal Brexit.

Price advances remain interesting for mid-term bears and the 1.25 handle could be a reasonably good level for strengthening short sterling positions.

Elsewhere, the antipodeans appreciate on a stronger and surprisingly resilient risk appetite. The NZDUSD is preparing to test the 200-day moving average (0.6310) for the first time since February.

The AUDUSD hit 0.68 for the first time since January, as the Reserve Bank of Australia (RBA) maintained the interest rates unchanged at today’s monetary policy meeting and said that the economic downturn could be less dramatic than earlier expected. Interestingly, here also, the growing tensions between the US and China didn’t hinder the Aussie appetite.

WTI crude continues its steady rise, despite a slower positive momentum, on talks that OPEC and Russia may announce further production cuts in the June 4 meeting, up to 9.7 million barrels per day, the equivalent of circa 10% of global oil production.

The smooth business reopening, on the other hand, boosts prospects of a faster improvement in global demand. For now, there is still a decent potential in basic demand recovery, although the rising US-China tensions may dent the appetite as prices move higher.

— The writer is senior analyst at Swissquote Bank