May 6, 2020

European Future Trade Lower After German Data

European Future Trade Lower After German Data

European futures are trading weak as investors are reacting to another feeble economic reading. The German factory order data has shown that the economic engine of the eurozone has too many problems, the data missed the forecast by a large margin. The actual reading came in at -15.6% while the forecast was -10%.

In addition to this, the German constitutional court’s ruling made it clear for investors yesterday that there is not much support for the ECB’s easing program. This triggered a sell-off for the Italian bonds and the Euro.

The Euro is down again today against the dollar and Italian bond yields are likely to suffer again. However, today’s German factory order data could soften the German stance towards the ECB’s recent bond purchase program.

As for Coronavirus, investors are struggling to convince themselves that the pandemic situation will not become worse as both Europe and the US lift the lockdown. These measures were put in place to bring the outbreak of Coronavirus under control, but the global economy cannot remain in a lockdown forever. The fear is that the public may not adhere to social distancing rules, and the careless attitude may push us back into lockdown.  

Yesterday’s equity market rally was primarily supported by oil prices as Brent prices crossed above $30. Clearly, the optimism of the re-opening of the global economy has supported the oil rally. The West Texas Crude June contract has nearly increased three times since it made its recent low. The famous notion “buy when there is blood on the street” certainly holds its merit for this particular event. Investors were so panicked when the May oil contract traded below zero that there was no demand when the West Texas June contract fell below $7.

The fear-mongering headlines pushed investors to the sidelines because it was pretty clear that the price was likely to follow the same course as the previous month’s contract. Nonetheless, the price has increased since then and the June contract is back above $24.

Gold trading is back in demand as some of the largest hedge funds have increased their long bets because of the unprecedented debt levels. The yellow metal is up nearly 12% year-to-date. The fear among investors is that the loose monetary policy and central banks’ direct involvement in high yield space, presents a threat to fiat currencies. Hence gold is an attractive investment.

The precious metal did perform well when the Federal reserve started the quantitative easing program during the financial crisis, but the shining metal also took a bad hit when the Fed began to unwind its loose monetary policy. The only difference this time is that the Fed, along with other central banks, have started to intervene in junk bond space. These are toxic assets and printing money to support these assets is likely to debase the respective country’s currency. This is because each nation’s debt will continue to balloon further.

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