May 20, 2020

Equity Markets Unsure About Their Direction

Equity Markets Unsure About Their Direction

European futures are trading mixed today as the enthusiasm fades about a vaccine by Moderna. A health publication report showed that the vaccine is still very much in its early stages, and there are considerable hurdles ahead. Experts still need to see more data from the company before they draw any firm conclusions, and this took the wind out of the US equity session yesterday. The sell-off became intense during the final hour of trading and the S&P500 closed with a loss of 1.05%, and the Nasdaq dropped 0.36% while the Dow Jones declined 1.59%. 

Market participants have once again made it clear that their appetite for riskier assets is based on the development of a vaccine for Coronavirus. This confirms what we have learned during the past few weeks. Basically, the moment we get any positive news on vaccine or treatment of Covid-19 patients, traders cheer that news and load their portfolio with riskier assets.  In fact, it may not be a far-fetched statement tosay that a vaccine is more important than monetary or fiscal support.

Over in the UK, traders are wary and angry at the UK government after the death toll reached the highest level in Europe. Over 40,000 people passed away due to Coronavirus, and this is a colossal disaster. And yet, rather than taking the responsibility for this, ministers have started to play the blame game. According to them, the government received wrong advice from scientists. 

Chancellor of the Exchequer, Rishi Sunak failed to reassure the markets yesterday. He believes that there will be no immediate bounce back and that the recovery is likely to take much longer than previously anticipated. The latest data on the UK consumer price index 12-month rate dropped to 0.8% against the previous reading of 1.5%. The UK’s fiscal position remains weakest among the G10 currency, and Brexit situation does provide any help. Despite this, Sterling is still trading higher against the dollar

As for precious metals, investors are still mostly bullish, and they are finding every pullback as an opportunity to add more gold to their portfolios. One can hardly blame them for this strategy, and this is because we are still far from seeing daylight in terms of an actual vaccine for Coronavirus. Speculators can blow things out of proportion the moment they get any news about a Coronavirus vaccine. But, when the optimism fades and reality becomes apparent, investors are left with no option but to hedge their bets.

On top of this, Donald Trump is determined to fight China, and this only anchors geopolitical tensions. No one wants to see the US-China trade relation becoming sour, as we are talking about the world’s two biggest economies. Anchored political concerns only make investors think that it is a good time for them to hang out in haven assets. Having said this, if the US economic recovery picks up steam and sentiment begins to improve, it won’t be a surprise to see some nasty corrections for the gold price.