Marius Paun | London, UK | Senior dealer | Thursday, 11th June 2020
Last week the tech dominated Nasdaq 100 has become the first major US stock index to reach an all-time record high after the abrupt selloff due to coronavirus. It continued its rally during the current week closing above 10,000 for the first time ever and yesterday touched 10,156. Even the most pessimist investors had to acknowledge the impressive rally – more than 40% since the lows of March.
In comparison, while Nasdaq is now up more than 10% for the year, the Dow and the S&P are yet to reach break-even. Probably the first reason for the surge is the health issue. Most of the countries reported a drop in infections as well as casualty rates and are underway of reopening their economies. From that point of view, it appears the worst is over. Surely, the world does not have a vaccine yet, and if history is anything to go by (Spanish flu a case in point) a second wave cannot be discarded, but for now things are getting better.
The second driver is the economic one which is still open for debate. The reports are still showing some weak numbers but investors seem to care more about the actual data versus expectations, rather than the numbers themselves. Some upside surprises definitely helped in heightening optimism after the lockdown measures were eased. Last week’s US employment report showed 2.5 million job gains vs predictions for over 8 million job loss. Earlier in the week MBA Mortgage Applications report indicated Composite Index up 9.3% with Purchases up 5% and Refinance up 11%. The low interest rates are a big helper, especially when it comes to housing.
On top of that there are trillions in fiscal and monetary stimulus that has already been released and talks of an additional stimulus package potentially in the pipeline. As these measures are dwarfing the intervention of 2008 financial crisis, the traditional saying ‘don’t fight the Fed’ was truly taken to another level … don’t fight the Fed let alone the Fed and the Treasury?
But the primary reason for Nasdaq 100 reaching all-time high lies is in its constituents. The lion share of the recovery has been driven by Facebook, Apple, Amazon, Google, Microsoft and Netflix, stocks that were already the markets darlings. Some of them, like Amazon and Netflix, were actually obvious beneficiaries of lockdown. Others big techs companies (Google, Facebook) were simply not disadvantaged as hard as other stocks.
A weaker US dollar undoubtedly boosted the rally back in stocks as well as contributing to the return of risk-taking attitudes. Reuters reported the greenback is ‘down 6.6% against a basket of currencies from a three year high in late March, the sharpest drop in about 2 years.
Last but not least, the Fed just gave investors last night more reason to be cheerful. At the FOMC meeting Chair Jerome Powell said they will keep interest rates near zero through 2022. If some investors thought the excellent non-farm payrolls data might just weaken the Fed’s commitment to ease the monetary policy, they were left disappointed: ‘We’re not even thinking about raising rates. We’re strongly committed to using out tools to do whatever we can for as long as it takes’.
And now the very interesting bit. Powell was asked about potential bubbles and capital misallocation. And he argued the Fed would not hold back from stimulus simply because there were concerns assets were rising too fast, ‘we’re supposed to pursue maximum employment and stable prices’. So put another way, they can accept bubbles as a side effect as long as the rising of asset prices is done in an orderly, ‘stable’ fashion?
There are however risks on the horizon, the reignition of US-China trade dispute, Europe not doing enough to address its bear market and the dreaded second wave which could prove a big dampener for some industries.
What’s more V shaped than this chart?
It shows the low of 6632 on 23rd of March followed by an incredible rally to over 10,000 this week. Even more impressively, as it made fresh all-time highs, technically, Nasdaq is not in a bear market rally anymore but rather it has resumed its long-term bull run. The short moving averages crossed above the long-term moving averages on 30th March (not bad for a signal) and is now still pointing upwards. The current price remains above both indicators.
Bulls are clearly in control even allowing for today’s retracement. They will be looking to move back above 10,000 mark. On the downside, bears will have in mind support around 9750, the previous record high. If that will be retested successfully, a stronger support could be found at the 9500-9550 handle.
Marius Paun | London, UK | Senior dealer | Tuesday, 09th June 2020
One by one the economies around the world have reopened from Coronavirus lockdown or, by and large, are in the process of doing so. Investors sentiment has improved dramatically since stock markets’ lows of mid-March and although many remain cautious, a V shape recovery continues to take shape. In the currency markets, the US dollar is currently under pressure driven by the return of risk-on trades as heightened expectations for ongoing economic recovery reduced safe-harbour demand for the greenback.
Last Friday, the US Department of Labour released its latest non-farm payrolls data which was a shockingly good surprise. Almost all analysts predicted we’re in for more gloomy news, expecting the US to lose more than 8 million jobs last month. Yet, it turned out to be a net gain of 2.5 million jobs, the biggest ever recorded as many furloughed employees have returned to work during the gradual reopening. Demand for various goods or services has shown signs of rebound almost as quickly as it evaporated in the first place and employers needed to reset things in motion.
The jobless rate declined to 13.3% in May from a post-war record high of 14.7% in April fuelling hopes the world’s largest economy is healing after the pandemic. The strongest gains were in the very same industries hit hardest by the lockdown measures. Capital Economics who run the numbers, indicated that ‘leisure and hospitality, retail and construction together made out for more than half of the total rise in the employment’.
Nonetheless even the optimists agreed the numbers will need to be confirmed going forward by the next few months data before more sceptics become convinced this is the real deal. If it turns out the US’s really is on the right track and it’s not just a statistical fluke, the Federal Reserve may need to be less aggressive with its monetary easing policy than previously thought. In turn, interest rates might not stay lower for as long as initially forecast.
On the other hand, the euro has been boosted by the European Central Bank announcement on Thursday of increasing its emergency bond purchasing scheme to 1.35 trillion euros. The Pandemic Emergency Purchase Programme, the latest addition will be 600 billion euros which surpassed expectations. On top of that, Germany, who so far has been accused of being rather tight with its cash, announced a big stimulus of own worth 130 billion euros. Finance Minister Olaf Scholz said it is meant for business and consumers and includes a one-off payment of 300 euros per child.
The move marks a shift from Germany’s status quo fiscal tightness stance and could indicate Germany is getting a bit more serious in its support for a European Union rescue fund. Only time will tell if that help came rather too late politically when reopening the Europe’s economies is well underway. What’s interesting is that normally money printing brings downside pressure on currency. In this case investors contemplate the fact that Germany could mean business this time and especially after Britain’s leaving, they want to strengthen the case for the eurozone members staying together.
It could also be out of outright necessity. European Banks have done dreadfully after 2008 crisis compared with their US and UK counterparts. But again, the US fixed its banking system very quickly after the credit crisis, the UK took longer but it has done it as well. The eurozone is still struggling to match the pace of correction, mainly because the ECB answers to a lot of individual governments which despite the rhetoric, have little interest in supporting each other’s banking systems. If now is not a good excuse in front of German public to open the wallet, it probably will be difficult to find a better time!
EURUSD was trading just below 1.1340 on Tuesday afternoon, not far from the strongest level in almost three months at 1.1383, reached on 05th of June. The chart shows a steep selloff lasting two weeks in March followed by a quick rebound. It has gone sideways largely between 1.08 – 1.10 for two months until recently when it broke higher. The current price level more or less matches the level before Covid-19 slump.
The short-term moving averages are above the long-term ones and both pointing upwards. The price is above them. All these are bullish signals. On the upside we can see resistance at 1.1330 has just been breached but it needs to be confirmed with a close above it. Next in line for the bulls will be the aforementioned 1.1383, the three months high. On the downside, sellers could target 1.1240 followed by support at 1.1190. 61.8% Fibonacci retracement at 1.1170 could also be in the bears’ mind.