Market Overview

Now not only European equity markets, but also the Euro currency is jumping higher day by day. The EUR/USD exchange rate added 275 points in the first five days of June to a peak of 1.1383 this morning. The last time a sharp rise to such levels occurred was at the very beginning of March. At that time, initially, the single European currency compensated its unjustified cheap value in response to the first collapsing movements on virus-contaminated global markets before most investors rushed to buy US Treasuries for safety reasons. The next wave of recovery happened two months ago, at the end of March, from the price bottom below the 1.0650 to 1.1150 area and pushed the EUR/USD up along with stock markets that reversed upwards, driving the Euro too.

The nature of the single European currency soaring in the first summer week is the market's optimism that is increasingly inclined to follow the V-trajectory of the recovery in most asset prices. In this regard, today's new three-month record of the pan-European composite index Euro Stoxx 50 at the level of 3340, just after it managed to break through the psychological resistance of 3000 ten days ago, as well as similar movements in Italian, French, and German stock indexes, fuelled even more the reasonable feeling that the Euro currency may soon be even more expensive since there are no strong urgent risks to switch to the US Dollar.

On Thursday, the European Central Bank (ECB) kicked off both the European currency and many European assets at the same time. ECB’s first lady, Christine Lagarde, clearly stated that ECB did not discuss purchases of "junk" bonds as part of the Pandemic Emergency Purchase Program (PEPP) package to support the small- and medium-sized companies. In the regular meeting on Thursday, ECB’s policy-makers decided to boost the regulator's PEPP expenses by EUR600 billion to EUR1.35 trillion altogether, while the average expectations of market experts were limited to a maximum of EUR500 billion volume. The purchases under the PEPP are expected to continue until at least to the end of June 2021. In addition, Madame Lagarde said that "Q2 contraction will be unprecedented", but "economy has showed signs of bottoming out", and added pointed to the ECB's baseline scenario, which is a fall in the Eurozone's gross domestic product (GDP) by 8.7% for the entire year of 2020 and growth after that by 5.2% in 2021. These may considered to be quite normal and seemingly sane expectations that do not resemble forecasts of a new economic apocalypse. She expressed confidence that a good solution will be found with regard to German court ruling on ECB bond purchases.

According to ECB's estimates, prices continue to be depressed by the economy as the level of inflation outlook has been downgraded due to uncertainty. Inflation is expected to decline somewhat in coming months, the ECB statement said. This is technically bad from the point of view of economic activity, but at the same time it fuels the hopes of many market participants and businesses that all monetary stimulus from the ECB will last for a very long time, at least for all of 2021. At the same time, Europe simply does not have the space to lower interest rates below the current negative values while there are different opinions regarding the policy of the US Federal Reserve (Fed), where rates may be lowered or remain at the same level. The situation in Europe regarding interest rates is not going to change in the foreseeable future. This creates a variation of expectations for interest yields in public and even corporate bonds, which are already decreased during the pandemic and are clearly not in favour of America, and may decrease even more.

The ECB clearly appreciated the European Commission's plan, which last week the Bank of America christened as "Make Europe Great Again", or "MEGA", describing it as helpful for the Euro. The single currency may have a chance to continue more active growth against a basket of other competing currencies, such as, the Japanese Yen or the British Pound, although in the case of the EUR/GBP pair more questions arise since the UK economy may benefit if a separate trade agreement with the United States is on the table. But for the Euro it is now easier to grow versus the US Dollar, when riots are raging in American cities, creating a little extra nervousness for the Greenback. At the same time, this does not prevent further growth of US stock indexes, which also creates prerequisites for the outflow of Dollar-centred capital due to the lack of the demand for safe haven assets.

The Olympian calmness of investors is most likely due to the multinational nature of most companies traded on the NYSE and NASDAQ exchanges in New York since their income comes from outside the US or from online networks that has little to do with the situation inside the US, even when talking about the companies with American roots. The US asset investor crowd is now represented mostly by  V-shape recovery adepts. The important thing for them is that the riots do not wipe out Donald Trump's government just several months before the election. These are more science fiction ideas, and the rest is a matter of market technique and fundamental hopes for a better post-pandemic future. In normal transparent elections, Trump seems to have more chances to win - hands down - and to achieve an even more convincing victory than in 2016. The only thing that could in theory weaken his position is a new lockdown. Such a probability could increase in the event of an official announcement of the second wave of the virus by the World Health Organisation. However, looking at things realistically, the chances of autumn re-quarantining tend to come to zero in the US since Mr Trump will most probably never allow this to happen on the eve of the election.

Any new crazy rising in unemployment and the potential second collapse of stocks is unacceptable for President Trump's team before November elections. At the same time, medicine and the state structures have gained the necessary basis to become resilient to a relapse of the corona virus. The US military generals are in charge of the entire infrastructure they created in advance for distribution of the officially approved vaccines, which the research institutes are expecting to be delivered by the end of the year. Trump's rivals in the election race represented by governors in half of the states are also unlikely to risk angering their electorate at such a moment when people will find that Democratic states’ authorities do not allow them to go to work and earn money again. Trump and Republicans at the federal level are two-handed for continuing "new normal" life as quick as possible. Therefore, in a fair play election battle Joe Biden is probably doomed. Markets are ready to bet on the continuous "Buy Everything" rally just with some periods of price corrections keeping in mind the 2016-2020 "Trump rally" as his lawn at the White House.

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