Profit taking on softer risk appetite, rising doubts on OPEC+ meeting, ECB decision

ECB chief but Christine Lagarde will likely show teeth to soothe investors that the bank is ready to do what’s necessary to reach their mandated goal.
ECB chief but Christine Lagarde will likely show teeth to soothe investors that the bank is ready to do what’s necessary to reach their mandated goal.

By Ipek Ozkardeskaya

Tensions between the US and China escalate as China blocks American shippers from reentering China and Donald Trump suspends Chinese airline passenger flights to the US. The UK on the other hand announced it will welcome three million Hong Kong residents that have seen their rights and freedoms smashed by the new national security law.

HSBC and Shanghai Banking Corporation, two British institutions, which have strong ties with mainland China, backed the new law, however. HSBC shares gained 1.57% in Hong Kong, on relief that the bank certainly won’t lose its access to a major business pillar as a result of frictions with the Western world.

And a strong ADP read gave a major boost to investors sentiment in the US, as the data showed that the US economy lost 2.76 million jobs in May, meaningfully better than 9 million decline expected by analysts and nearly 20 million job losses announced a month earlier.

The ISM non-manufacturing PMI confirmed a slower contraction in May. Both data supported the idea of a faster post-Covid recovery. The Dow closed Wednesday’s session 2% higher, the S&P500 gained 1.36% and Nasdaq advanced 0.78%.

Mood in Asia was less cheerful, however, as data showed that the Australian retail sales slumped 17.7% in April and European data will likely confirm a 15% decline later this morning, as well. Nikkei (+0.17%) and ASX 200 (+0.96%) edged marginally higher, as stocks in Hong Kong and Shanghai recorded timid losses on rising US, China tensions.

Industrial metals softened, as oil retreated. WTI crude ran into a brick wall near $38 per barrel. The price of a barrel eased to $36 pb as oil investors preferred taking no risk and realizing profit amid US oil inventories pointed at a surprise 2.1-million-barrel decline last week, and the rising uncertainty about the much-expected OPEC-Russia meeting pinned investors’ hopes that a 9.7-million barrel production cut may not be announced this week.

But given the optimism on post-COVID economic normalization and joint efforts to curb the global supply glut, price retreats near and below the $35 mark could be good dip-buying opportunities. Solid support could be found near $32/30 area.

Activity on US and European futures hint at a neutral start on Thursday. The FTSE 100 is expected to consolidate gains below the 7400p mark on stronger pound and pause in oil and commodity gains.

In the currency markets, the US dollar is better bid against its major counterparts. The latest US dollar rebound is more of a correction of past week’s sharp losses than a trade for safety.

The EURUSD consolidates gains above the 1.12 mark after having rallied above its 100-week moving average (1.1220) on cheaper dollar and prospects of more monetary stimulus at today’s European Central Bank (ECB) meeting.

The ECB is expected to maintain the interest rates unchanged at today’s monetary policy meeting and to extend the Pandemic Emergency Purchases Program (PEPP) by 500 billion euros to give a further relief to the European economies ravaged by the coronavirus shutdowns.

However, there is a risk of the ECB adopting a cautious tone regarding the extension of its asset purchases before getting things straight with the German court. Certainly, the European Council’s proposal of 750-billion-euro fiscal rescue package could take some pressure off the ECB’s shoulders, but Christine Lagarde will likely show teeth to soothe investors that the bank is ready to do what’s necessary to reach their mandate goal — boosting inflation toward 2%.

Now that investors have massively bought the expectation of further bond purchases, even the announcement of a 500-billion-euro extension in PEPP could trigger a ‘sell-the-fact’ reaction and encourage a short-term downside correction in EURUSD, which has hit the overbought market conditions following last week’s sharp gains.

A correction toward 1.1130 (minor 23.6% Fibonacci retracement on April – June rebound) should be healthy. The key support to the latest rally stands at 1.1050, the major 38.2% retracement, which should distinguish between the consolidation of the actual positive trend and a medium-term bearish reversal.

Cable’s upside potential was capped near 1.26, the ceiling of the three-month slightly down-trending channel. A further correction in the dollar could pull the pair down to its 100-day moving average (1.2480). Pound bears have certainly little scruple reversing their short-term long positions as the UK remains firm on its decision to quit the EU by the end of this year.

The decision deadline is June 30. There is one rising hope, however, that the COVID-19 crisis could tilt the balance in favor of a deadline extension as Scotland, Wales and Northern Ireland are pushing for a two-year extension to give British politicians more time for finding a plausible exit deal with its European counterparts.

Elsewhere, gold attracts buyers below $1700 per oz, the USDJPY is set to test the 110 mark on the back of a resilient global risk appetite and a positive correction in the US dollar.

The USDCAD sees decent support near its 200-day moving average (1.3465) and could rebound to 1.3750/1.3800 on softer oil.

— The writer is senior analyst at Swissquote Bank