Market Overview

29 May 2020

The US Monetary Policy Could Make Europe Greater Again

European stock markets opened lower this morning, according to a natural scenario of partial profit-taking actions on the last Friday of the month, following a light correction in US composite indices, which took place at the very end of yesterday's trading in New York. However, the decline in the S&P500 stock index just an hour before the final bell happened shortly after reaching a new two-month record peak above 3068 points, and only selected assets were then a subject to remarkable corrections, including mostly the shares that were well grown over the previous two weeks.

S&P500 futures are down just 1.77% from their highs and are trading in the first half of the day in the range between 3010 and 3035, which is significantly higher than the landmark support zone around 2950, which was broken in the middle of May to give a new boost to growth. The Euro Stoxx 50 composite index has lost about 0.9% so far compared to yesterday's peak values, when it soared to 7.35% above the opening of the month. Renault shares slumped 3.5% after the French carmaker announced it would cease assembling vehicles at several plants in France as it will cut some 15,000 jobs worldwide. As for the German Xetra DAX 30 and the French CAC 40 indexes, they are trading higher than the April resistance levels. In this regard technically it may open the road to the new market achievements in June, at least if May trading ends in the way it is currently moving.

It is particularly noteworthy that the US currency is still near its lows of the month in relation to such currencies as the Australian Dollar, the New Zealand Dollar and even the Canadian Dollar, which was undercut by a rather weak oil factor and by the dropped revenues in the country's international trade balance. An even more important sign of relative market indifference to possible actual risks is the growth of the single European currency, as EUR/USD started the week around 1.09, and today showed a midday high above 1.1135.

The Euro's upward movement against the US Dollar was technically launched after the EUR/USD exchange rate did not go deeper than 1.0870 in an attempt to test the bottoms of the last eight weeks, but instead moved to the 1.10 area again, where the safe haven status of the Greenback did not attract the usual influx of buyers. The main fundamental factor of support for the single European currency, apparently, was The European Commission proposal on Wednesday to offer 500 billion Euros in grants and 250 billion Euros in loans in a recovery fund for the regional coronavirus-hit economies. That triggered a rally in EUR/USD, EUR/GBP, EUR/CHF and EUR/JPY, and also in European equities and in southern European bonds. 

Although there is still a lot of passion and controversy over the use of any allocated anti-crisis fund in Europe in terms of timing, targets and methods of allocating funds between countries, analysts at Bank of America (BofA) have already christened this fresh EU fiscal spending package as the "Make Europe Great Again" plan. BofA even said the "Make America Great Again" policy pushed by US President Donald Trump to boost the American economy had supported the Dollar until now, and "Make Europe Great Again", or "MEGA", is now likely to help the Euro. They added that it was the best shot at "ending the region's equity bear market and reversing the US Dollar's rally".

By the way, when crunching numbers to scale the impact of the virus on the world economy, BofA noted that the global Gross Domestic Product (GDP) had seen $10 trillion in losses, policy stimulus so far has totalled $18 trillion and there have been 122 interest rate cuts globally. As for rather fresh data, the German retail sales dropped by 5.3% in April, falling at their fastest pace since 2007, but the reading was much better than the anticipated 12% fall.

It is possible that the unwillingness of many investors to wait too long with large volumes of the US currency in their hands may also be influenced by expectations of the chances that the US Federal reserve may still come later this year to a negative interest rates conception, while the European Central Bank (ECB) has no space to go deeper with its interest rates. It is also unlikely that the US authorities are interested in stronger national currency exchange rates, because of trading balance and public debt considerations, and since they have tried to dilute the currency broth with as many freshly emitted green bills as possible. Only some unexpectedly deep and sharp corrections in global stock indexes, if they take place at some point, could cause a new rise of escapist sentiment back to the Greenback.

For that matter, the nearest test for the strength of the markets may be not only the end-of-month factor itself, which is by its nature fleeting and transitory, but also the nervousness ahead of President Donald Trump’s expected response to China's tightening of its control over the city of Hong Kong, ahead of President Trump’s statement, which will probably be given later today in the evening or on the weekend. 

American relations with Beijing have been strained before because of White House attempts to clarify the origin of the virus and to raise the question of presumably belated initial informing of the world community about the degree of the COVID-19 danger. Of course, the markets would like to hope that the whole reality show is going to be limited to individual sanctions against specific persons from the Chinese communist leadership or against just a few companies, and that China could also symbolically mirror the response. A new era of trade war between the world's two largest economies may also put European governments in a rather uncomfortable position demanding a reaction as connections with China are an important part of the European economy recovery too.

By the way, the Chinese foreign Ministry has already said that it will take countermeasures against the UK – Hong Kong was one of its colony until 1997 -  if London begins to offer permanent residence to Hong Kong citizens. In this context, it is a great success for continental Europe that the UK is no longer the member of the European Union, so that it will not be directly involved at least in this UK-China dispute.


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
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