Market Overview

26 May 2020

The American and European Markets: Birds of a Feather

Fresh German economic indicators provided additional support not only for European stock indexes, but also to global markets. At the beginning of the week a Munich-based Leibniz Institute for Economic Research, better known as IFO, which is an acronym from Information and Forschung (research), published its monthly estimates which are beyond the expectations of the expert community.

The German IFO Business Climate Index beats forecasts with a value of 79.5 points in May. That is firmer than last month's 74.2 points, and previous data from April 24, that, apparently, may form a pandemic bottom, from which the indicator confidently pushed off. The consensus estimated by Reuters poll pointed to a reading of 78.3 point.

The IFO Business Expectations component was even more optimistic at 80.1 points vs 64.9 points in April while the average preliminary expert forecasts was at 75 points only. This figure slightly exceeded the March 79.5 number. The IFO Expectations Index indicates corporative projections for the next six months. Meanwhile, the Current Economic Assessment came to at 78.9 points in the current month as compared to April's 79.4 and 80.0 anticipated.

In addition, the GfK (Growth from Knowledge foundation), which has been providing its data and analytics since 1934, released its Germany Consumer Climate index which is actually -18.9 points in May after -23.1 level in April. Combined together these indicators suggest a faster recovery curve for the German economy, which is truly the engine of the entire European economy. The data is mildly encouraging even though the German authorities forecast a further 6.3% drop in Gross domestic product (GDP) by the end of August after the German GDP already declined by 2.1% in the first quarter of 2020 on decrease in private consumption (-3.2%), a fall in equipment production investments (-6.9%), as well as a drop in imports (-1.6%) and exports (-1.3%).

Strict quarantine measures were introduced in Germany only in mid-March, which means that their impact has not yet been fully manifested in the Q1 reports. The GDP decline was already the strongest since the global financial crisis of 2008-2009 and the second largest since the unification of Germany in 1990. However, many investors were encouraged by the release of the interim data now, which indicated the first glimmer of light at the end of the pandemic tunnel. In response to these reports and due to the high closing of US stock indexes before the weekend, the German Xetra DAX index climbed for two days in a row, not only adding more than three % to its opening Monday's quotes, but also breaking its previous peak of May and approaching the April's highs.

This move also pushed both the French CAC40 stock index and the Italian stock exchanges to a higher level. As a feedback effect, it helped the US S&P500 index futures soar higher. Therefore, on Tuesday the S&P500 index exceeded the key 3000 points mark for the first time since March 6, meaning it was there the previous time at the very beginning of the market thrash.

If nothing serious or unexpected spooks investors in the coming days then some calming on the markets regardless of pre-election US-China rhetoric, plus technical patterns, may contribute to the continued rise in indices and share prices of the most stable companies. Perhaps, with the exception of the badly affected sectors, i.e. banks, travelling and offline entertainments. The high-tech Nasdaq index was fuelled more than others by "stay at home" stocks and therefore is able to claim an update of the annual highs that were shown in February and which are just around the corner. The United States last week performed respectable data from the construction industry, including Housing Starts and Building Permits.

Just as birds of a feather, the American and European stock markets interact in the same way, helping each other to move further. Meanwhile, the situation is different on the Forex market, where the single European currency is benefiting from the global stock growth along with other currencies that compete with the US Dollar. The smaller number of market participants have reasons to avoid risks, the more they are attracted to growth potential in such pairs as EUR/USD, AUD/USD and even sometimes in GBP/USD, although the consequences of infection are deeper right now in the UK than in continental Europe.

The Greenback has generally been seen to slip today amidst additional vaccine hopes and as Japan reopens its economy too. Late Monday, the US biotech company Novavax said it has begun trials for a coronavirus vaccine in Australia. It expects preliminary results from the Phase One clinical tests in July, and upon successful completion of Phase Two more trials are going to be conducted in several other countries, including the United States. Novavax is only one of many drug makers around the world racing to find a vaccine. The end of the year was previously named as an expected proper time for the vaccine distribution by US President Donald Trump. In Russia, the state scientific centre "Vector" also predicts the final version of its vaccine to be ready before the end of the year or even in the middle of autumn. Until then, the degree of economic recovery in the context of a COVID-19 "new normality" may remain the main gauge, to which market trends would adhere.


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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