May 5, 2020

European Markets and US Futures Trade Higher

European Markets and US Futures Trade Higher

European futures are trading higher as investors are optimistic about the re-opening of the global economy. More and more countries are moving closer to easing the lockdown measures. This was one of the key reasons that the US stock reversed their losses yesterday and the S&P500 eked out some minuscule gains towards the end of the session. The rally was mainly led by the tech stocks and this is why the NASDAQ index stood taller in a relative perspective –it scored gains of 1.33%. The Dow Jones and S&P500 surged 0.11% and 0.43% respectively.

Having said this, there is still no shortage of skeptics in the current stock rally, because for them, everything is still pretty much on shaky ground. These disbelievers are hoping that the dismal economic data will bring a reality check for the market participants.

To some extent, there is some merit to this argument, especially if one starts to factor in the recent flare in tension between China and the US. In addition to this, there are also concerns about the second wave of infection that anchors up the possibility of another economic disaster. This is why some traders do like to position themselves more defensively. This lack of conviction has resulted in less stock volume over the past few weeks.

Oil prices are trading higher today as the world returns to its new normal. Former pandemic hot spots such as Italy and Spain have eased off the lockdown measures yesterday and the UK’s path to exit its lockdown is likely to be laid down this week. All of this optimism has helped the oil prices to record the longest run of daily gains in more than nine months. This further strengthens the argument that the worst may be over for oil and given the fact that the oil producers have started to curtail voluntary and involuntary supply cuts, the supply and demand curve may reverse its course. Having said this, the June contract for the West Texas Crude oil is still prone to risk because of the storage issues.

In terms of economic data, the RBA kept the rates unchanged as expected. All eyes will be on the US ISM non-manufacturing PMI reading that is due later today. This is the first important set of economic readings ahead of Friday’s US NFP data and it is likely to set the tone for the US trading session. The forecast is for 37.5. As long as the actual number matches the forecast, we may not see much adverse reaction in the markets. However, if the margin is much adverse (between the actual reading and the forecast), market participants are likely to punish the equity markets by making the sell-off more intense.

Finally, the precious metal, it is holding steady and trading above the $1,700 mark. The rise in tension between the US and China is helping the bull case, for now. Nonetheless, as long as the price stays above $1,700, the hope remains for the price to continue its journey to its next resistance of $1,768. Moreover, the US Treasury Secretary has said that he plans to boost the US borrowing by an unprecedented $3 trillion. Gold traders consider higher borrowing as a higher risk, and this makes the precious metal more attractive in the long term but only if the borrowing fails to boost the economic growth.

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