Market Overview

12 May 2020

Markets Follow Positive Scenario in Alarming Mode

The Nasdaq Composite stock index of high-tech sectors ended the New York trading session on Monday with its highest value since February 24, 2020, thus erasing 85% of the total amount of losses from the peaks of this year and to the bottom in March. Companies based on online services and the so-called "stay-at-home" stocks are the first priority in demand during the pandemic. Therefore, the average index of their prices, which is the Nasdaq, may serve as a kind of leading indicator for the still lagging US S&P500 broad market index and even for the European and other important global markets. However, the S&P500 index was also able to recover by almost 62% to date close to the well-known third Fibonacci retracement "golden ratio" level.

Both above-mentioned stock indexes form technically ascending price channels with two support zones of April 21 and May 4. Technically these channels create certain prerequisites for the possible continuation of market growth despite the relatively small downward corrections within these price channels. The notable attempt of correction originated on April 30, but lasted no longer than three trading sessions as it was associated with renewed US tariff threats against China. But this story has faded so far as the Chinese Vice Premier Liu He, US Trade Representative Robert Lighthizer and US Treasury Secretary Steven Mnuchin agreed they will work together to create a favourable environment for implementing Phase 1 of the trade deal reached in January this year. Official reports of their phone conversations were received last Friday, but US President Donald Trump toned down his еpatage rhetoric even before that.

As trade tensions ease, markets seem to temporarily stop worrying about it. However, a new excuse for anxiety was found on Monday, which caused prices to make another call for a small downward correction last night. The Chinese city of Wuhan, where the pandemic originated, reported its first five new infection cases since its lockdown was lifted more than a month ago. A fresh outbreak in night clubs in South Korea and record number of new cases in a day in Russia were also cited. However, both Asian spots are very small in number and localised, and most of the new Russian cases are asymptomatic and clearly associated with a sharp increase in testing to almost 30,000 tests per day. The support level in the area of 2900 for the S&P500 futures remains stable and safe, so today in the European trading session prices again pulled above 2930. Nasdaq futures generally hold the previous 9300 height above Monday's close.

Another positive development on markets happened because the reasons behind correction last night seemed to not be convincing enough. So, the most likely scenario still looks like moving the indices in the direction of "North", especially concerning stay-at-home shares prices. It seems that markets consider the positive scenario to be the basic one until the opposite is clearly proven, or at least until rather sporadic alarm signs have reached a critical mass.

However, as more countries gradually ease restrictions in an effort to restart their economies, more investors are also becoming anxious about a second wave of infections. Much will depend on whether influential institutions and media take the "bright" or the "dark" side of the process. For example, Germany's Robert Koch Institute reported that the "reproduction rate", which is the number of people each person infected goes on to infect, had risen globally to 1.1 again while any rate above 1 means the virus may be potentially spreading exponentially. If new relapses occur after many countries managed to take the spread of the virus under control and stop the first wave of the epidemic for more than a month, markets may consider it an alarming sign. This could mean another wave of the virus spread may cover Europe and America a couple of months later.

There is another reason for market doubts whether they were too brave to buy the "bright future" of the recovery, which is not given and actually expected in the economy only many months later. It turns out that the markets are now very ahead of the economy, relying on the new monetisation of global corporations and new profits of their sustainable business models. However, everything is not so rosy. The growth of companies ' revenues is going to be slow at best and it may take a longer time, during which the infection wave may return since many people who were quarantined are asymptomatic but they could be virus carriers. People understand this and may appear in public places much less often than they did before. Moreover, they may have spent a significant part of their savings during the quarantine period and thus change their consumption patterns.

While businesses have mostly restarted in China, households stay cautious. Restaurants are open, but many seats are empty. Vehicle sales bounced off the bottom but are well below usual levels. "Households in the U.S. and Europe will surely mirror this wary attitude even as activity picks up. The re-opening of the global economy will likely follow the shape of activity in China. Businesses there have restarted operations but are not necessarily at capacity," says Bob Baur, Chief Global Economist at Principal Global Investors. Statistics in Sweden, where the authorities did not impose strict quarantine measures, and restaurants and shopping centres remained open, showed that residents reduced restaurant visits by 70% and lessened their spending on usual purchases by almost half. It is unlikely that any fundamentally different scenario awaits service companies immediately as they get out of forced restrictions in other countries.

"Markets have been torn between optimism on the tentative re-opening of some economies and caution on the still grim economic data... any recovery in equity markets is likely to be fragile for now, as markets will watch for cracks in the financial system and elsewhere in the economy as virus infections climb," said OCBC Investment Research in a Tuesday markets note.


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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