As has so often been the case in recent weeks, unrestrained hope of economic recovery that comes with a vaccine is short-lived.
Traction in the breakouts for risk appetite is difficult to maintain as markets always have a “but” as a restraining caveat. COVID-19 vaccine hopes and talk of more stimulus from Japan are helping to hold a degree of positive market sentiment, but the prospect of US sanctions on China are looming like dark clouds on the horizon. The US is opposed to China extending the security legislation in Hong Kong. Sanctions are being considered which would threaten Hong Kong’s status as a financial hub and would significantly ramp up tensions between the two economic superpowers of the world.
According to President Trump, the US is doing something and will announce more at the end of the week. Subsequently, whilst equities are still climbing slightly today, there is a more mixed outlook for risk today. US Treasury yields are ticking lower, whilst the dollar is clawing back some of yesterday’s losses. The safe haven yen is also regaining some lost ground on higher risk cross currencies, whilst oil is giving back some recent gains too. For now these moves are only slight, but if the US pushes hard for sanctions on China, it would be something to really drag on market sentiment towards the end of the week.
Wall Street closed with decent gains, albeit off the highs of the session, with the S&P 500 +1.2% at 2992. US futures are showing positive moves this morning, with the E-mini S&Ps +0.5% but Asian markets still have something of a mixed outlook today. The Nikkei was +0.7% and Shanghai Composite -0.5%. European indices seem set to follow US futures, with FTSE futures +0.5% and DAX futures +0.3%. However, when FTSE outperforms DAX, historically the rally has tended to be on shaky ground.
In forex, there is a risk negative bias, although only minor coming into the European session. USD is outperforming broadly with gains of around +0.2% against several of the majors, aside from a consolidating JPY.
In commodities, there is a continues slide on gold, which is pulling back towards $1700, whilst oil is around -1.5% lower on both WTI and Brent Crude.
With a quiet European morning for the economic calendar, the Richmond Fed Composite Index at 1500BST is the first real data of note. The index is expected to suggest a bottoming out has taken place, with May’s reading at -40 (up from -53 in April). It will also be interesting to see what the Federal Reserve’s outlook for the US economy is currently, with its Beige Book released at 1900BST.
There will also be keen interest in what ECB President Lagarde has to say about the ECB’s COVID-19 response in a speech at 0830BST today.
USDCAD has broken down and near term focus is on 1.3605. This is the 61.8% retrace of the rally from the December low, trendline, and lower parallel from a bearish channel. Resistance should be the underside of the channel center line and recent lows at 1.3850.