Market Overview

In the last week of May, most of the market assets usually do not tend to show excessive activity in their movements up or down. Just on rare occasions, new mini-trends formed at this time may be able to exist for more than a few days of June. Most often, such tendencies are so short-lived that they do not survive even until the end of the week due to the fast profit-taking. This can be explained by the natural logic, which is to say that a sufficient amount of time is already spent on digesting the season of corporate reports  during a time when really vital new economic indicators are absent, and also such a behaviour is expected after observing the markets in May for decades.

This year’s economic releases, like the US Durable Goods Orders for quarantine April or some updated figures of the Gross Domestic Product (GDP) report from the United States for the first quarter, may not cause anything but a condescending smile since too many elements of the collapse of everything already passed and other processes of recovery have long begun since then. The American Red Book and Beige Book reports, which are going to be published today, as well as Richmond Manufacturing index, Dallas Fed Services revenues, Texas Services Sector Outlook or the Canadian Building Permits, are unlikely to bring fundament new colours to the whole picture.

However, the way May ends considering stock indexes, and particularly shares prices, currencies and gold can serve as a useful indicator for June trading. A fairly intensive closing of profitable positions on the highly expensive "stay-at-home" shares did not come as a surprise. It took place for Amazon immediately above $2500 per share. Netflix declined by more than $40 lower in price, from a peak of almost $460 per share to the $415 area for now. And even for Apple Co most of the short-term buyers preferred to take their profits on Tuesday, so that the opening price gapped to almost $324 per share while the closing of the day was below $317.

However, this observation concerns only those assets that have managed to increase significantly in price over the past couple of months. Many lagging but promising stocks, on the contrary, are growing faster, which is clearly noticeable in the fresh daily peaks of the US and European composite indexes. The European EURO STOXX 50 stock index reached new two-month highs today, the same with the German Xetra DAX. Together they are likely to achieve a similar momentum as the French CAC40 soon. The markets are already used to almost everyday success movements of the US’s S&P500 stock index, but now it behaves in a particularly positive way, reaching the level of 3037.8, which is much higher than the previously passed mental limit of 3000 points. The situation seems to be moving towards a month’s high closing prices for all main global indexes. Therefore, the chance of new record peaks is more likely for the S&P500 and European composite indexes over the following weeks.

It is very interesting in this regard that stock exchanges refuse to pay much attention to the verbal aggravation in the US-Chinese tensions segment. US President Donald Trump has promised a US reaction by the end of the week to the Chinese national security law which critics have called a direct attempt to curtail Hong Kong special status with its unique freedoms. The proposed law underwent a second reading in the city’s Legislative Council, and also China retaliated by threatening countermeasures against any US action, including sanctions. Mainland China authorities announced last week that they are ready to directly enact laws to tackle secession, subversion, terrorism and foreign interference in the city. 

White House economic adviser Larry Kudlow said on Tuesday that President Donald Trump is so “miffed” with Beijing over the coronavirus case and other matters that the US-China trade deal is not as important to him as it once was. Speaking to the Fox News Channel, Kudlow also called Beijing’s actions in Hong Kong very disturbing. He said the US-China “Phase 1” trade deal reached in January was intact for the moment, but that the Trump administration was watching to see whether Beijing will meet the commitments it has made. US Trade Representative Robert Lighthizer, Treasury Secretary Steven Mnuchin, China Vice Preimer Liu He had a “constructive meeting” about the trade deal recently, Kudlow says, so the deal “is on for now”. He also remarked that the Trump administration would welcome back any American company in Hong Kong or on the Chinese mainland that wanted to return to the United States. “We will do what we can for full expensing and pay the cost of moving if they return their supply chains and their production to the United States,” Kudlow added.

Kudlow also said Chinese companies must comply with the US auditing standards, and that they are not transparent enough. Although back in the fall he told reporters: “The delisting is not on the table. I don’t know where that came from”. “What we’re looking at, actually, is investor protection, US investor protections ... transparency and compliance with a number of laws,” he said when citing complaints from exchanges. And the focus was that White House administration convened a “study group” to examine those issues, it was “very early” in its deliberations.

“We are in a broad risk-on trend, but the only thing that can change this is the US-China relationship,” Junichi Ishikawa, senior FX strategist at IG Securities, told CNBC. Apparently, major players on the market understand that the failure of the "Phase 1" deal would be a huge minus for Trump's November presidential campaign, and they do not believe that Trump's team could sacrifice the deal. In addition, such a development could easily trigger a second wave of falling stock markets, even if there is no real second wave of pandemics or infection in the United States. That would probably destroy the second important trump card out of the hands of Trump's second term ambitions. From these considerations, the majority of the market has concluded that all the accusations will be limited to shaking the air and showing the electorate that Mr Trump is allegedly ready to treat China tougher than Mr Obama did or than Mr Biden could have done. Sanctions against individual Chinese officials may be imposed, or the US authorities could restrict the rights of individual companies, such as Huawei.

Such risk-on sentiment has been confirmed recently by the sliding down of gold prices, which just in a few recent days have declined from their peaks near $1765 to $1705 toz. On the foreign exchange market, the safe-haven status of the Greenback is also losing its former popularity while the growth of the Aussie, the Loonie and the recovery of the South African Rand is gradually picked up by the single European currency. The EUR/USD was able to exceed the landmark of 1.10 today after technically refusing to fall below 1.0870 and did not try to test, or taste, the main support area of 1.0730-1.0790 anymore before the end of the month.

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