Market Overview

16 April 2020

Markets Have Taken a Nervous Wait-And-See Attitude, Economy Reopening Options Are in Focus

After yesterday's hard trading sessions, stock indexes in Europe and in the United Stated descended a little lower but it seems that most of the market participants were not very scared. Such conclusions could be made in the light of the fact that European stock indexes today opened slightly higher if compared to Wednesday's lows and closing prices. The French CAC 40 index, which declined the most yesterday, after extending the quarantine measures by French President Emmanuel Macron for almost a month, held for now within 61.8% of technical Fibo levels from the full height of the previous week's rise.

The pan-European Stoxx600 index behaved similarly and the German Xetra DAX index corrected within 50% of its April gains as one of the economic powerhouses gives the most promising signs. The viral statistics in Germany has a stable downward slope so Chancellor Angela Merkel announced tentative steps to start returning the country to its normal mode by allowing some smaller shops (up to 800 square meters) to reopen next week and schools to gradually restart their work in early May. But most of the restrictive orders remain in place: restaurants, bars, gyms will stay closed indefinitely. "We have made some progress. But I do have to stress that this progress is fragile," she said after the meeting with the main regional officials of the country. "This is a situation in which caution is the order of the day and not foolhardiness."

The decline in all the US stock indices was also limited and this morning they made up for some of yesterday's losses. Most of the market participants do not believe too much in some harsh negative scenarios of the nearest development of the economy. They bet more on gradual and smooth steps to re-open America since the end of April and during the course of May. Therefore, they are more adhere to a slow path of recovery in terms of capitalisation of the companies. Many assets were under-priced before in March, reflecting the worst market expectations of the moment and they are both rebounding more according to the prevailing concept that maybe the worst possible future has already been included in those prices at last week's bottom. Such moderately positive expectations drove prices later while high uncertainty is still shaping the whole process.

Markets are still inclined to attribute the negative background of American viral statistics for the last couple of days, with two outbreaks of fatalities and a radical change in statistical methods, when the data on deaths "with" coronavirus in many states are mixed together with all similar in appearance causes with other lung diseases without even testing for the virus. New figures for promptly revised cases are more likely to be added to the data for the last couple of days since there are no changes in the statistics for all previous periods.

Now no one knows exactly what the published statistics correspond to in reality, but still there are no other independent and reliable data. This new method of the official US national statistics may be either the result of too literally following of the guidelines of the World Health Organisation (WHO) and to the recommendations of other experts who tend to dramatise the situation or it may also be a part of the political struggle between the two largest American parties in the election this year. Both reasons were already discussed here. Markets prefer to treat some statistical jumps in infection or death cases rather in a neutral manner as soon as they are local or do not constitute a long-term trend. The price of most assets respond to these statistics now with a limited reaction, waiting and listening more to the statements and concrete steps of the authorities.

Meanwhile, the conflicts between state governors and US federal authorities about the possibility of an early opening of the economy continue with the coming into play of mass protests by citizens. Thousands of protesters in their cars and with horns honking thronged around Michigan's state Capitol on Wednesday, some chanting "lock her up" addressing stay-at-home orders imposed by state Governor Gretchen Whitmer. "Traffic was jammed for hours by the rally, dubbed "Operation Gridlock" and organised by the Republican-aligned Michigan Conservative Coalition to challenge the Democratic governor's social-distancing measures, one of the strictest throughout the nation.

The latest version of Gretchen Whitmer's executive order bars residents from travel between homes or using motorboats, prohibits retail sales of home furnishings, garden supplies or paint while leaving marijuana dispensaries open, Reuters reported. Michigan met one of the fastest-growing infection in the United States with more than 27,000 confirmed cases and nearly 1,800 victims. But "critics of Whitmer, widely seen as a potential running mate for presumed Democratic presidential nominee Joe Biden, object to what they call inconsistencies and over-reach in her response to the public health crisis", the article says.

New York Governor Andrew Cuomo has hired high-powered consultants to develop a science-based plan for the safe economic reopening of the region that can thwart the expected pressure from President Donald Trump to move more rapidly, state government sources told Reuters on Wednesday. Governors from seven East Coast states formed an "anti-Trumpist" coalition led by New York to develop a joint very slow reopening plan. "We think Trump ultimately will blink on this, but if not, we need to push back, and we are reaching out to top experts and other professionals to come up with a bullet-proof plan," said an unspecified Cuomo adviser.

US President Donald Trump is still eager to open the economy as soon as possible and not to listen to other points of view too much. His government is trying to determine whether the coronavirus emanated from a lab in Chinese Wuhan. The Secretary of State Mike Pompeo said Beijing "needs to come clean" on what they know. That could create new potential tensions between US and China and in the longer term it may also add worries to the markets. China's foreign ministry reacted already by a short statement that the World Health Organisation has said there is no evidence that the coronavirus was made in a lab. And just several weeks before the official representative of the Chinese foreign Ministry referred to investigation data that all types of strains of the virus are located only in the United States. He said that only one strain has been detected in China so far, so the virus could have a non-Chinese origin but it could have been imported to China by the US military or other American visitors.

All these exchanges of pleasantries from the world of politics create hidden potential threats to the investment community, but so far they have little impact on stock market movements. Technically, a partial return of the US Dollar's moderate strength against not only emerging market currencies, such as, the Turkish Lira or the South African Rand, may sound like a muted alarm bell for the markets as it continue to spread to some major currencies, such as, EUR/USD, GBP/USD, AUD/USD and others. This may indicate a limited but recovering demand for the Dollar cash or for US Treasury bonds in the face of increased uncertainty. It would be wise to carefully monitor whether these limited tendencies would increase in earnest to track a possible wave of sell-offs of stock assets. In the meantime, this is just a potential signal that has no serious effect on the market.

The corporate reporting season has started this week. Individual shares price movements will become significantly dependent on the revenue figures and forecasts of both representatives of the companies themselves and the expert community. Those movements may determine the market as a whole. Even for those investors who do not yet dare to make even small portfolios of shares or corporate securities during the previous four-week rebound, this may be the time to look at least for the future on which companies will feel more confident during the reporting season. If the capitalisation of the particular company does not grow directly in response to the reports, then at least it would be interesting to see what companies will sink less. Accordingly, in the future, it's on the basis of the report season "stress-test" for the shares, it may be possible to focus additional efforts on trading opportunities and probably portfolio strategies on such more stress-resilient companies by choosing the appropriate time for this later. China's Q1 gross domestic product (GDP) data may also have a certain impact on the market sentiment, it's due to be released early Friday morning.


Disclaimer:

Analysis and opinions provided herein are intended solely for informational and educational purposes and don't represent a recommendation or investment advice by TeleTrade.

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