May 19, 2020

US Futures Set To Build More Gains

US Futures Set To Build More Gains

US futures are trading higher and traders are somewhat cautious after yesterday’s mouth-watering rally. It appears that equity markets have given a clear indication of what can drive the price action higher – a coronavirus vaccine or a treatment of COVID-19.

Yesterday’s stellar rally in the global equity markets was pretty much a repeat of the price action that we experienced a few weeks ago, when Gilead Science announced positive news about the treatment of COVID-19 patients. It is clear now that traders are ready to overlook any other factor that can hinder an upward price action. All that we need is a vaccine for Coronavirus and investors are likely to pour money into equities with both hands.

For investors, a vaccine is an ultimate solution, and this may be especially true because there was an echo of this message in the Federal Reserve Chairman’s message as well. Perhaps if we do get a vaccine, it may be easier for businesses to rehire their employees because they are likely to increase in business activity.

However, one chief obstacle that market participants are largely abandoning is the heightened tensions between the US and China. Donald Trump is expected to anchor those tensions in the coming days, given his election agenda.

From a technical perspective, the price action for the Dow Jones index on a weekly time frame looks strong now and it is likely to remain like this if the price stays above the 200-week SMA. Similarly, the S&P500 also cleared another significant hurdle yesterday when the price crossed above the 100-week SMA. Once again, the index is likely to recover its yearly losses if the price stays above this moving average.

Franco-German Deal Helped Italian Bonds

Over in Europe, it is all about the Franco-German deal. Basically, Germany and France settled to support a 500-billion-euro rescue package for the European Union. The EU was likely to collapse due to the impact of Coronavirus pandemic and hence a rescue package was greatly desirable.

This is a momentous decision taken by both nations to display solidarity and tighter integration.  President Emmanuel Macron labeled this as a major step forward. Grants will be given to member states that have been most influenced by Coronavirus.  The joint EU debt deal helped the euro currency to move higher against the dollar, and the Italian bond yields are also likely to improve further today.

UK Jobless Claims

As for the UK, the jobless claims surged by 856K during April and the average earnings index plunged to 2.4%. However, the unemployment rate dropped to 3.9% from the previous level of 4.0%. But this unemployment rate may not be a correct reflection of the economy because many jobs are supported by a government scheme. Nonetheless, traders have given a free pass to this data and as a result, the Sterling-dollar pair moved higher and crossed above the 1.22 mark.  

Commodities

In the commodity space, crude and Brent prices scored more than a 10% gain yesterday. Traders are building on these gains today as both oil prices are up by more than one percent. However, it is likely that the price may have gone too far, too quickly. Investors are optimistic that the demand situation will continue to recover, especially since the oil demand in China is pretty much back to its pre-crisis level. Despite this, the December contract for crude oil doesn’t show that price can top the $40 mark. Hence, it may not be a far stretch to say that oil prices have reached its ceiling—for now.

Precious metals experienced some profit taking yesterday as investors favored riskier assets. Investors must keep in mind that the US interest rates may never see a day in negative territory if an effective vaccine becomes available. Businesses will find a way to push the activity level back to its baseline and under that scenario, we may be looking at an interest rate hike option, not an interest cut. Although we are still far from reaching that outcome because returning business activity to its normal level isn’t going to happen overnight.