May 12, 2020

European Markets Trade Lower

European Markets Trade Lower

The US equity markets staged another rally yesterday with both S&P500 and NASDAQ indices closing in positive territory while the European markets closed lower.

Investors in Europe are set to pick up the momentum where they left off yesterday and it seems like bulls are out of luck for now. When we look at the weekly chart for the major European indices, it becomes clear that the massive upward rally that we experienced since the COVID-19 low has lost its luster.

There is no doubt in saying that the US equity market is still in a much stronger position as compared to European markets and this is mainly due to the tussle war between the ECB and Germany over the Coronavirus aid package.

Christine Laggard wants to help the Eurozone through liquidity measures and Germany isn’t ready to back this. The recent challenge by the German constitutional court and the corresponding response from Brussels has aggravated the situation further. For investors, this means a real threat for the Euro and hence they favor the US equity markets.  

Only a Handful of Stocks

Having said this, investors do need to account for one important factor that most of the gains for the US equity markets are mainly driven by a handful of stocks. For instance, for the S&P500 index, it is only five stocks that have pushed the S&P500 to its current levels. The rest of the S&P500 have not seen much action and the ones which have seen some life, are finding it difficult to hold on to their gains. To put things in perspective, only 29% of the S&P500 are trading above their 200-day moving average. But bulls do argue that that 69% of the S&P500 stocks are above the 50-day moving average and as long as this remains intact, the chances are that the upward momentum will improve.

No Luck for Sterling

Over in the UK, the government released further details on its lockdown policy. A 50-page document was published with details on social distancing, exercising, and returning to work. But Boris Johnson, the UK’s prime minister, made it clear that the key criteria for these measures to be put in place is that the infection rate needs to remain low. He stressed that Coronavirus was not a short-term crisis and periodic epidemics might happen. Sterling moved lower against the dollar.

The sterling-dollar price is in battle with the 50-day moving average on a daily time frame. If the price drops below this moving average, the odds are stacked in favor of a lower move. However, if the price stays above this average, we may see the pair recover some of its losses.

Gold Continues Its Struggle

Gold price is finding it difficult to maintain its upward movement as investors are favoring the dollar over gold. This is despite the fact that we had eye-watering US NFP data last Friday. The precious metal dropped below the critical level of 1,700 yesterday and it is still struggling to stay above this.

The upcoming US CPI m/m data is unlikely to bring any significant moves for the metal because inflation doesn’t hold the same importance as it did before. The Fed is more focused on bringing the growth back to its normal level. Jerome Powell, the Fed chairman is determined to do whatever it takes in order to achieve the Fed goal and this means loose monetary policy for an extended period of time.

Having said this, investors need to keep one thing in mind, that the Fed isn’t ready to push the interest rates into negative territory like the European Central bank. Charles Even, the Chicago Fed President and Atlanta’s Fed President, Raphael Bostic, both have said that there is no motive for the Fed to go that far with its monetary policy. Nonetheless, as long as the Fed keeps the liquidity taps running, it is likely that the gold price may continue its journey to the upside. But, if investors start to favor riskier assets, we may not see any momentous rally for the precious metal.  

Saudi Arabia Feeling the Pain

After a significant rally in oil during the past few days, oil prices have started to consolidate at current levels. Saudi Arabia is feeling the pain of lower oil prices. Hence, the country tripled the VAT yesterday. The country may have lower breakeven cost for oil, but its expenses are mammoth, and for this reason, the actual breakeven cost is much higher for the country. The Crown Prince has a lot of work to do if he wants to bring those unnecessary expenses down. For now, higher VAT and some minor initiatives to control cost have been introduced. But raising taxes on the public during the Coronavirus time period may hurt the country’s growth more.

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