Risk appetite has turned sour in recent sessions and the news from China over the weekend now threatens to really crank up the momentum of flow back into safe haven asset plays.
The risk recovery took a turn last week as second wave infection rates in some US states started to increase again. Over the weekend, China has reported the re-emergence of COVID-19 infections and the threat of renewed lockdown. For now, this is only localised to Beijing and measures are rapidly being deployed to control the situation, but if this develops into something much bigger again, the world will take a collective gasp. Second wave infections have always been a distinct likelihood, but can they be quickly contained without the need for renewed lockdown measures?
Today we see equities falling sharply in early moves, whilst Treasury yields are falling, all meaning the safe haven currencies (Japanese yen, Swiss franc and US dollar) are performing well. Big question marks now hang over the capacity for demand recovery and this is hitting the oil price again today. It is interesting to see gold is (perhaps counterintuitively) falling, but this is something to certainly keep an eye on today. Adding to risk aversion today, we see that China data for May has all come out softer than expected, with misses on fixed asset investment, retail sales and industrial production, even if they did all improve on April’s numbers. Given news of a potential second wave, it could make the Chinese authorities more nervous about easing restrictions and a slower recovery could ensue. That would play negatively into market confidence too and this could be a real test for sentiment in the coming sessions.
GBPUSD is nearing possible support from the line off of the March and May lows near 1.2420. Also, VWAP from the May low is currently 1.2413 (now shown) and the 50 day average is 1.2417 (not shown). Bottom line, I’ll be interested in the long side if GBPUSD responds to the 1.2410/20.