Market Overview

5 May 2020

Markets Are on the Crossroads as US-China Tensions Mute

After three days of corrective trading sessions in most stock instruments, which were triggered by a technically overbought picture, overpriced expectations and fresh trade war worries, the markets look more open-eyed and ready for a more balanced analysis before taking the next step.

Natural market doubts at such superior price levels, which were able to force many investors to urgently fix their profits received over the previous six weeks and threats about new US tariffs against China, served as a catalyst for such profit-taking. However, all those reasons remain relevant, but the markets have managed to shave off some ballast, so technically the threat of continued profit-taking in lower prices has become a little weaker as the S&P500 stock index had been able to jump on Monday evening from under the previously broken support at 2800 and even reached the higher zone between 2850 and 2875 by today's European noon.

These "feats" were nudged by temporarily muted US White House anti-Chinese rhetoric. No new charges have emerged at highest levels of the American authorities. Moreover, deputy national security adviser Matthew Pottinger voiced the view on Monday that the United States is not considering "punitive measures " against China over its "covering up" the start of the pandemic, taking a more dovish stance after recent public threats by US President Donald Trump and some of his team members. The British Guardian cites anonymous intelligence sources as saying that there is no current evidence to suggest that the coronavirus leaked from a Chinese research laboratory and this sharply contradicts recent White House claims that there is growing proof that this is how the pandemic began. The Guardian sources insist that a "15-page dossier" highlighted by the Australian Daily Telegraph which accused China of a deadly cover up was not culled from intelligence from the Five Eyes network, an alliance between the UK, US, Australia, New Zealand and Canada. "British and other Five Eyes agencies do believe that Beijing has not necessarily been open about how coronavirus initially spread in Wuhan at the turn of the year. But they are nervous about getting involved in an escalating international situation," The Guardian wrote.

It's clear that this game may still be far from over. But the move from Britain might be clear in not supporting the US in yet another battle to knock down China. Nevertheless, concerns about a new trade battle between the world's two most powerful economies have eased. And, if resumed, trade tensions could lead to an additional reduction in global growth just when it is most needed.

Investors will continue to be extremely alert to all fresh signals in this regard, but some potential positive change may take place due to the principle known in some philosophical traditions as "action is liberation". Actions performed by many market participants before, when they have already transferred too expensive assets to cash in a proper time at the very beginning of the last downside correction wave, calmed many investors and instilled confidence as their accounts become less dependent on current price fluctuations.

This situation partly enables markets for more effective and smarter analysis without being too much in a hurry. And those who would still like to add new purchases to their portfolios will probably be able to do so over the coming days at lower prices and with a thoughtful look at technical signals and corporate news. Those who feel extreme uncertainty in the nearest future may also be able to get rid of their securities using opportunities of price hikes rather than selling at any price. The whole picture is unlikely to be changed quickly, but the answer to the main question is which way the seesaw will eventually swing with a higher probability of it changing every day depending on the fresh tariff news and technical signals.

The news background on Tuesday is still moderately positive, at least in the first half of the day. European stocks pushed higher from the market's opening led by gains in the banking and oil sectors. The German Xetra Dax and the French CAC indexes rose, but a number of European investors are concerned about the decision taken by the German Constitutional Court that gave the European Central Bank's three months to correct vagaries regarding the Bank's QE policy, and especially the bond purchasing program.

BNP Paribas shares soared over 4% after reports that its revenue remained resilient in the Q1 2020 despite profit falling by a third as the Eurozone's biggest bank set aside more than half a billion Euros in loan provisions. This lifted the entire European banking sector higher, with French Credit Agricole gaining 5.4% and Societe Generale gaining 3.3%. Oil futures gained Tuesday reaching $28 per barrel for the Nord Sea Brent benchmark amid signs of economy reopening in India, which is the world's second most populous country after China, and some reports of persistent Indian purchases of cheap oil for strategic reserves.

Statistics from the United States showed a marked decrease in the number of new infections detected for a fourth day in a row and to below 25,000 level, and this is despite a multiple increase in the number of newly made tests. Over the past two days, an average of 1,542 deaths have been recorded there, which is almost half the peak levels. Investors are still inclined not to pay much attention to the ominous new forecast from the University of Washington's Institute for Health Metrics and Evaluation (IHME) that predicted nearly 135,000 Americans may die from COVID-19 by early August, almost doubling previous projections. That projection, first reported by the New York Times, also forecasted about 200,000 new coronavirus cases each day by the end of May or in mid-summer, which is eight times up from the current rate.

Commenting on the IHME forecast White House spokesman Judd Deere said: "This is not a White House document, nor has it been presented to the Coronavirus Task Force or gone through interagency vetting." President Donald Trump said on Friday, he hoped fewer than 100,000 Americans would die, and had talked last week of 60,000 to 70,000 victims. But on Sunday night, the president acknowledged the death toll may climb much higher. "We're going to lose anywhere from 75, 80 to 100,000 people. That's a horrible thing," he told Fox News. At the moment, the number of victims in the US was officially 69,925, but the rate of new fatalities has fallen. Many market participants keep these statistics under constant control, fearing that states with already lifted quarantine restrictions may decide to reinforce these restrictions in the near future.

In Italy, which was one of the worst affected countries, the number of new cases fell to 1,221 yesterday, after 6,557 at the peak on March 21, and the number of virus deaths is less than 200 per day for at least two days, compared with five times higher values at the peaks. Italy is among the first European countries that tentatively eased coronavirus lockdowns to revive economies, and it also gave some hope to the European and global markets.


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

Lysakov Sergey
Market Focus

Material posted here is solely for information purposes and reliance on this may lead to losses. Past performances are not a reliable indicator of future results. Please read our full disclaimer.

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