April 30, 2020

French GDP Shrank Ahead Of The ECB Meeting

French GDP Shrank Ahead Of The ECB Meeting

European futures are moving higher on the final trading day of the month. Traders are giving a free pass to dismal French GDP data that confirmed GDP contraction of -5.8%. Investors are optimistic about the possibility of a treatment for COVID-19. Basically, any drug that can combat the pandemic is a game-changer.  

Investors have also ignored the US GDP reading which came in much worse than the market expectations yesterday. The US GDP data confirmed the biggest contraction in the first quarter since 2008.

US futures are also getting a lift from better than expected earnings from the like of Microsoft, Tesla, and Facebook. The S&P500 is close to its seven-week high and it is set to record the best month in decades.

On the monetary policy front, the Federal Reserve’s chairman acknowledged in his speech that the pandemic is going to leave a permanent scar on the economy. The fact that the chairman said that means there is a need to further confirm that the Fed is fully committed to support the markets. This reinforces the belief that the Federal Reserve bank is expected to keep the interest rate at rock bottom level for an extended period of time.

The Fed has also made it clear that the burden of economic weakness must be shared by fiscal policies, and the US fiscal policies should enact a series of aid packages to support the economy. Although, there was also a hint of sharp recovery from contraction levels as the economy begins to open.

One element of disappointment from the Fed’s meeting was that the Fed provided no clarity with respect to their “other tools of monetary policy” to support the economy. Remember, Jerome Powel, the Fed chairman has referred to this many times before, but no one knows what other tools the Fed can use to stimulate the economy.

All eyes will be on the ECB meeting that is taking place later today. The ECB has many wars to fight and the depth of the economic downturn is one of them. But above all, it is the sovereign debt crisis in Italy that is the biggest challenge for the president of the ECB, Christine Laggard. The ECB’s PEPP buying of more than 70 billion Euros has failed to keep the lid on the insurance cost of five-year credit default swaps. The spread between the German and Italian 10 year has spiraled as we mentioned yesterday. Italian sovereign rating is being watched after a downgrade by Fitch Ratings. The question for today is if the ECB will accept the junk-rated debt for its loans.  

In the commodity space, oil futures have continued to rebound, recovering some of their losses. Both Brent and Crude oil prices are higher today. (more on how to trade oil)

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