Market Overview

1 June 2020

Summertime, Stocks Are Jumping and The Aussie is High

The first official day of summer started with jumping, an immediate downside gap and then fast recovering up in the American S&P500 stock index futures just after the record closing of May. There is a noticeable sense of relief in market sentiment since US President Donald Trump limited himself mostly to cool speeches in response to Chinese lawmakers actions as they endorsed Hong Kong national security law. No tariffs or fares, nothing that could call into question the previously concluded "Phase One" trade agreement.

Mr Trump announced during Friday's press-conference just rather symbolically that a special trade status would expire step by step only for Hong King itself without affecting mainland China. This is not a strong blow since there are really not too much formal trade flows through Hong Kong itself. This territory is more famous as a large financial centre. Most-favoured-nation treatment proposed by the US government for Hong Kong is good but not critical from that point of view. The American President also promised to suspend visas of Chinese graduate students suspected of conducting research on behalf of their government.

He irrevocably confirmed that the US permanently stopped funding the World Health Organisation (WHO), which "did not agree to change". Donald Trump repeated his dissatisfaction with the fact that funding to the WHO from China was limited by $40 billion, and the contribution of the US reached $450 billion. But the WHO supposedly served Chinese interests, according to Trump’s words, as Chinese officials “ignored” their reporting obligations to the WHO and pressured the organisation to mislead the public about an outbreak. “We have detailed the reforms that it must make and engaged with them directly, but they have refused to act,” the US president said. “Because they have failed to make the requested and greatly needed reforms, we will be today terminating the relationship,” Trump added, also saying that the US would be “redirecting” the money to “other worldwide and deserving urgent global public health needs,” without providing specifics.

But all that was said did not come as a surprise to the markets. So the initial gap down was more of a ritual or symbolic nature today in early Asian hours. In the European morning today US stock indexes, German Xetra Dax, French CAC 40, pan-European Euro Stoxx 50 composite indexes showed an excellent performance. The upward movement may not seem steady and strong yet, but in any case, they all soared above both the April and May highs. Further developments may show us whether "living" in June markets will be as "easy" as it is sung in the famous Summertime jazz composition by George Gershwin and DuBose Heyward. But for now, the crowd of investors has some rational reasons to breathe easily, spread their wings and... maybe take us to the sky.

Indeed, the upward movement on global and local stock instruments is also accompanied by the growth of currencies that are competitors to the Greenback. Among the currency basket today the Australian Dollar has distinguished itself the most. Riskier currencies rose against the Dollar on Monday as many investors looked to positive signs from China's post-coronavirus recovery and bet on an easing in US-China actual tensions. The trade-sensitive Australian Dollar surged more than one % to a 11-week high of $0.6771 to lead broader than other companions like New Zealand Qiwi or Canadian Loonie, and even more cautiously  than the British Pound. All these currencies were additionally encouraged by the Caixin/Markit Purchasing Managers Index showing marginal but unexpected improvement in Chinese factory activity in May, as it reached 50.7 points level vs 49.6 averagely expected and after 49.4 in April.

The Australian Dollar was the standout gainer as it climbed also to a three-month high against the Yen in AUD/JPY and a ten-month high on the Loonie in AUD/CAD, because Australia is the closest trade partner to China. Also, the Reserve Bank of Australia (RBA) will meet tomorrow to set the monetary policy, but it is unlikely to change settings since Governor Philip Lowe said clearly last week that further easing or negative rates are unlikely to be required.

Some investors may be unhappy to get more US Dollar-nominated assets as protesters have flooded the streets in several states of America after the death of George Floyd caused by police brutality, in a wave of outrage and violence sweeping a racially divided nation less than six months before the presidential and parliament election. Along with remaining doubts about the theoretical prospects of negative interest rates in the US this may weaken the positions of the US currency, especially after the Federal Reserve’s (Fed) Chairman Jerome Powell remarked that he did not know whether negative interest rates are "good or bad", although his reasoning was made in a seemingly abstract manner.

But all these factors are only US Dollar-cantered, and they are unlikely to shift short-term optimism about the US economy. "It's tough to be a bear at the moment and the path of least resistance for risk remains to the upside in my opinion," said Chris Weston, head of research at Melbourne brokerage Pepperstone. Perhaps, at the moment it represents the most common opinion of market participants.


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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