The US Federal Reserve (Fed) minutes came out yesterday and didn't spoil lunch for the New York stock exchanges. Among the highlights are such sentences as: “To support the flow of credit…, the Federal Reserve will continue to purchase Treasury securities and agency residential and commercial mortgage-backed securities in the amounts needed to support smooth market functioning…” or “In addition, the Open Market Desk will continue to offer large-scale overnight and term repurchase agreement operations… The Committee… is prepared to adjust its plans as appropriate."
All hopes of maintaining and expanding existing financial stimulus are preserved, but generally, nothing remarkable is in the text. So, nothing prevented the high-tech Nasdaq100 stock index from climbing higher to reach the 9500 mark. Nasdaq readings, week by week, are getting closer to all-time February's highs near 9755 as it has been able to recoup 92% of the pandemic fall. The broad market index S&P500 has also moved forward, although it did not rewrite its previous peaks of the month near 2980 yesterday, but only nestled to the vicinity of this level.
The prospect of new records for the prices of indices and many stocks in this regard remains, but the market has every right to take a breathing space for now due to the impending long weekend. Monday, May 25 is going to be the Memorial Day holiday in the United States. Also the United Kingdom has the Spring Bank Holiday. By the way, Robin Hood, the "noble thug", according to legend, was caught just at one of the medieval spring competitions on such a day. And Muslims, in different traditions, celebrate Ramadan (Id-Ul-Fitar),and not only that, today many European countries have reduced working hours or even an additional holiday due to the Catholic Ascension Day.
Therefore, there could be a lot of silence or reflection in the markets, and the probability of sudden movements is lower than in usual days. The trading instruments that have been moving intensively before either, may continue to move further by inertia in the same direction, or some market participants could partially fix profits in the course of the movement, if they are not eager to leave their positions open for a long weekend.
Among the things that could trouble the markets in these days is yesterday's interview of the US Secretary of State Mike Pompeo on the Fox News TV channel, where he called China’s newest coronavirus aid pledge to the world of $2 billion as “paltry” given the number of lives lost worldwide. “This plague has cost roughly 90,000 American lives. More than 36 million Americans have lost their job since March. Globally, 300,000 lives,” Pompeo said. He added that the cost of the pandemic imposed on the world by “failures” of the Chinese government “could be as much as around $9 trillion, according to our estimates.” During the World Health Assembly on Tuesday, Chinese President Xi Jingping said that China is going to provide the equivalent of $2 billion to assist with economic and social developments and will target developing countries most affected by the pandemic. But the United States has provided $10 billion in international coronavirus relief for vaccine research and humanitarian aid, according to the words of Mike Pompeo.
This may raise many curious questions about whether America is actually going to issue a bill to China - if not in the amount of $9 trillion, then at least in the frame of $1.1 trillion, the total sum of American public debt held by the Chinese government. However, the head of the US Treasury, Steve Mnuchin, as well as advisers of President Trump have repeatedly spoken about the sacred nature of the national debt. US does not have legal mechanisms for financial influence on China through international organisations. So, most of the market is still inclined to view this as election rhetoric, which is going to remain just words.
Earlier on Sunday, one of President Donald Trump's top economic advisers, Peter Navarro, criticised China's response to the coronavirus outbreak too. On ABC's "This Week" Navarro claimed that it was China’s intention to harm the American economy: "I did not say they deliberately did it, but their China virus - let's go over the facts here, correct me if I'm wrong - the virus was spawned in Wuhan Province, patient zero was in November. The Chinese, behind the shield of the World Health Organization for two months, hid the virus from the world, and then sent hundreds of thousands of Chinese on aircraft to Milan, New York and around the world to seed that," Navarro said without offering any evidence that such tourist travel was directed by the Chinese government.
"I do think this election is going to be a referendum in many ways on China," Peter Navarro also said. "So we'll have Joe Biden, long friend of China. President Donald J. Trump, the only president in modern history to stand up to China," Navarro stated. Such words may indirectly confirm the electoral nature of all anti-Chinese rhetoric of the US President’s team. Yet, it's clear that no one can guarantee that something like this, only in an even more strident form, would not be expressed by someone else from the White House in the coming days. Therefore, some people in the market would become naturally and possibly cautious before a long weekend: probably not yet in terms of long-term prospects, but in terms of intraday trading results at least. They may worry about meeting market corrections again over a couple of days, as it has been seen three times in April plus one in May already.
Another disturbing signal came from the World Health Organization (WHO) that has reported 106,000 new cases of the coronavirus recorded worldwide in the last 24 hours - the biggest number in a single day yet. Most of these cases are due to burgeoning outbreaks in Brazil and Mexico, not in the US or Europe, where the economy and society are now dealing more with lifting the quarantine. At the same time, the Spanish government wins votes to extend the State of Alarm for a fifth time in the country until June 7, as opposition groups argued that the measure represents an attack on individual liberty and that the Prime Minister Pedro Sanchez has other legal measures at his disposal. On Wednesday, the government carried the motion with 177 votes in favour, 162 votes against and 11 abstentions.
"The State of Alarm has helped all of the country and all of the Communities - the most infected, such as Madrid, where new infections have fallen; and the least infected - because the virus didn't get there," Pedro Sanchez said. The measures would "not last one day longer than necessary. Nobody has the right to throw away what we have all achieved together," he added. The Spanish government is hoping that domestic tourism will restart the sector by the end of June, as Transportation Minister José Luis Ábalos says that the two-week quarantine for foreign arrivals will conclude, when national mobility restrictions are lifted and that empty seats on flights will not be required. Thus, some European countries also send mixed, rather than unambiguously positive or negative signals regarding the removal of economic restrictions step by step.
All these and similar news may be in the focus of attention for traders who specialise in stocks, or who are already thinking of whether to take some profits from the increased price of gold, or from the growing oil market, or to bet on further growth and development. Such matters may be more important than the analysis of current economic statistics at the moment, or even than some usual central banks statements. Investors are also waiting for the release of IHS Markit's manufacturing and services sector activity readings from the US for May. The numbers are expected to rebound to some extent after hitting rock bottom in April. This is what has already happened today with business activity data from European countries, when the French Manufacturing PMI for May was 40.3 vs 31.5 for April, as the Services PMI was 29.4 after 10.2 a month before. Data from Germany and the UK also showed a similar picture of partial passage on the path to recovery.
In this situation, the European and American stock markets do not compete so much as they can mutually support each other. On the other continent, the Reserve Bank of Australia’s (RBA) Governor Philip Lowe said today that early evidence showed countries with fewer restrictions were also experiencing very large economic contractions, suggesting individuals and businesses were reluctant to spend in the current environment. "Restoring confidence on the health front is a precondition for a strong (economic) recovery," Lowe said, responding to a question during an online panel discussion. “That would help both in Australia and globally," he added. When he was asked if the bank would consider negative interest rates, Lowe reiterated that it is "extraordinarily unlikely". This explains why the Australian Dollar and the New Zealand Dollar, representing the countries that were least affected by the virus themselves, are also limited in their movements to recover for higher levels, although they are much more successful in their growth than many European currencies.
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