European futures are climbing higher despite the fact that the German economy shrank 9.7% during the second quarter. However, the forecast 10.1% was much worse, and the fact that the contraction in the GDP wasn’t as bad as the forecast encouraged traders to back risker assets.
In addition to this, traders also know that the second-quarter numbers belonged to a period when lockdown measures were at their highest level. The focus is more on the bounce in the GDP number- likely to occur in the third quarter.
Stock traders are also optimistic about the US-China trade negotiations and the progress on the treatment of Coronavirus. This has put risk-off assets out of luck, and hence we see more sell-off for the dollar index. The weaker dollar is fuelling the rally in gold.
De-escalation of Tensions
The Dow Jones futures are moving higher today because the U.S. trade representatives have eased off tensions among investors. The recent escalation of geopolitical tensions between the U.S. and China fuelled concerns that the U.S. and China’s trade agreement can collapse.
However, both sides are satisfied with their progress on the trade agreement and the progress which has been made so far. Traders were concerned that the Trump administration will take a much harder stance against Beijing, as it failed to fulfill its trade deal due to the failure of the sufficient purchase of agriculture products from the U.S.
However, the outcome of the trade review between the two largest economies of the world has removed a significant obstacle for the global equity markets. This is the reason that we see some serious momentum for the U.S. stocks.
Optimism About Vaccine
Another critical reason that is also fuelling the coronavirus stock market rally is the optimism around the treatment of Coronavirus. Investors have been keeping close tabs on any potential vaccine-related news.
Yesterday, Moderna, one the leading company which is working on a potential vaccine for Coronavirus, confirmed that it is close to achieving a deal under which it could supply 80 million vaccine doses to the European Union.
On the other side, we have President Trump, who is determined to expand Coronavirus’s treatment through blood plasma donated by those who have recovered from Coronavirus.
The Reason For Stock Rally
For investors and traders, the cocktail of these events is a perfect excuse to push the stock indices higher, and this is the reason that we saw a strong close for the U.S. indices yesterday.
The steady flow of positive news on the coronavirus vaccine, treatment of Covid-19 patients and de-escalation of tensions between the U.S. and China can drive the S&P 500 index into a completely new territory. This new territory means another 20% appreciation for the S&P 500.
Forex and The Biggest Event
On the currency front, traders are eagerly waiting the outcome of the week’s biggest event that is taking place on Thursday. The Federal Reserve will provide a review of its monetary policy, and within that, there could be embedded many clues for the future course of the Fed’s monetary policy.
The dollar index has been under tremendous selling pressure because the Fed has pushed the interest rate lower, to its record level. Investors want to know if the Fed sees any recovery in the U.S. economy and if so, what does that mean in terms of their monetary policy.
Gold -The Hedge
Gold prices have been holding on to their gains today, and most of this is chiefly due to the weaker dollar. Having said that, investors are also paying attention to some crucial details in the coronavirus stock market rally. For instance, only a handful of stocks drive the gains for the S&P 500 index; only 57% of the S&P 500 stocks are trading above their 200-day moving average.
This clearly shows that the recovery is uneven, although yesterday we experienced a major rally in the airline sector—one of the worst sectors of the S&P 500 index. We do not see strong gains across most of the S&P 500 index sectors, which has kept investors somewhat wary of this stock rally, and hence more likely to hedge some of their risk by buying gold.