April 29, 2020

US GDP, Fed Meeting & Italian Yields In Focus

US GDP, Fed Meeting & Italian Yields In Focus

A Touch Of FOMO

Today is a risk-on day. Investors are building on Asian equity markets momentum.  All major Asian markets, Hong Kong, Shanghai, and even Sydney have surged today. The MSCI Asian index has rallied out of bear territory and this is an encouraging sign for European investors.

Nasdaq futures are supported due to strong Alphabet’ stock earnings. Overall, yesterday’s session was volatile, major US indices reversed their earlier gains and closed in negative territory because of the feeble US consumer confidence number. There was also intensive profit-taking in tech stocks ahead of their earnings. Tesla, Microsoft, eBay, and Facebook are slated to report their earnings today.

Another positive aspect that is helping the markets today is the fact that oil prices are trading to the upside as energy companies have started to report. BP reported yesterday and Exxon is slated to report its earnings today. There are two key factors to note here. Firstly, the enormous reduction in CAPEX spending among energy companies, and finally, the gigantic plunge in the US rig count numbers.

Both elements have sent the message clear and loud: time has come for curve inversion—meaning demand is likely to outpace supply. With the global lockdown measures easing off and reduction in oil supply—from the US shale oil producers and OPEC+ – the demand curve is likely to move higher while the supply curve moves lower.

The Price Range

It is vital to keep in mind that the ceiling for oil trading prices is between $25 to $28 for this year, and this is the best-case scenario. For investors, the opportunity may be in oil companies such as BP and Shell. Recall, BP assured investors yesterday about its dividend commitments, and under the current climate, it is like Christmas coming early.

New Catalyst

Overall, investors do need a new catalyst to push the US markets higher after a gigantic rally in US stocks from their COVID-19 low. This catalyst could be in today’s Federal Reserve meeting followed by tomorrow’s European Central Bank’s meeting—the two most chief meetings this week. Both are anticipated to do more to save their economies from falling into depression. Remember, the economic data is falling off the cliff—the US GDP data is scheduled later on today and it is likely to post historic drop.

Italian Sovereign Rating

Back in Europe, it is Italy that has become the centre of focus after Fitch downgraded the nation’s rating by a notch to BBB—leaving it just one notch above junk. This has augmented the chances of capital outflow and the country’s sovereign bonds are likely to get a hit today on the back of this.

The higher debt-to-GDP ratio isn’t desirable among investors. The 10-year bond spread between Germany and Italy is likely to widen up more today. The country dreadfully needs reforms but given the history, it is difficult to say any meaningful reforms will become a reality.

Gold May Move Higher

As for the precious metal, gold is still looking robust and it is expected to have noiseless a session ahead of the Federal Reserve meeting. The volatility in gold prices is likely to spike when the Fed will declare its monetary policy decision and most of the bets are in favour of higher gold prices. It is today that we may see the gold price coming out of its consolidation zone. (more on how to trade gold)

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