Market Overview

11 June 2020

Tailspin of US Equities Confusing European "Colleagues"

Prices of American stock futures, the European equity markets and a broad currency basket were seen to behave a little unusual on Thursday. The Euro Stoxx 50 composite index continued its three-day downward correction, opening today 2.65% below Wednesday's closing prices and 5.9% below Monday's highs. All these losses may have happened not only due to the mixed dynamics of US futures, but they may also have been caused by the Eurogroup meeting expectations as the EU finance ministers are going to discuss a 750 billion Euros recovery fund or fiscal plan during a video conference.

The agenda includes the Euro area aspects of the Banking Union, post-programme surveillance for Cyprus and Spain, the enhanced surveillance report for Greece, the revised short-term Eurogroup work programme, with economic situation and policy measures to support the recovery as a main course. The Eurogroup will hold a press video event at the end of the meeting and its preliminary start time is around 19.30 UTC. Investors are mostly concerned about whether the distribution of aid to the southern European countries will be sufficient since these states were the most affected by the pandemic and have the largest budget deficits and debt ratios.

The European Commission plans to disburse 500 billion Euros as grants and 250 billion Euros as loans, but some European countries are pushing for a bold and unprecedented fiscal stimulus, whereas others are more fiscally-conservative, so they are wary of taking on too much risk. “Given the differences between the EU commission and e.g. the Netherlands and Austria, the proposal for the recovery fund needs some work before it can be passed in the various parliaments,” said Danske Bank, in a research note.

The Portuguese Finance Minister Mário Centeno, who is also the Eurogroup’s president, has resigned from the national government, where he had served as a finance minister since October 2015. His resignation announced on Tuesday now triggers a contest for the Eurogroup’s presidency. He will still chair today's conference of the Eurozone finance ministers, where candidates to succeed him will be presented. His tenure will formally end on July 13 and his successor will be elected on July 9. Even before the official process begins three names are being mentioned as potential candidates: Spain’s finance minister Nadia Calvino, Luxembourg’s finance chief Pierre Gramegna and Paschal Donohoe from Ireland. 

As the European equities have performed a hefty rally from the very depths of the corona crisis with the stock indexes posting gains of over 30% from its March lows, the current reasons do not seem to be so serious as to interrupt the general market's recovering mode for a long time. Meanwhile, US stock indexes are showing "tailspin" of mixed dynamics, also confusing their European "colleagues". In full accordance with the name of the famous Disney cartoon, not only the shares of the Disney company jumped up and down in the last 24 hours.

Amazon, Apple and Tesla shares updated their all-time historical price peaks yesterday at $2670, $354.71 and $1025.05, respectively. The high-tech Nasdaq 100 index exceeded the psychological threshold of 10,000 points, reaching more than 10,155 at some point already after the Federal reserve (Fed) meeting’s results. Nevertheless, even after corrections, a closing near 10,045 is an unimaginable record height. That is why it is logically not so easy to blame the results of the Fed's meeting or the words of its Chairman Jerome Powell during the press conference for the subsequent deep and stubborn correction on Nasdaq100 and S&P500 stock futures during Asian trading and by the beginning of the European trading session.

Most likely, the markets are still dealing with the natural technical correction now, since almost all the stocks have taken too giant steps up over the previous few days, and many investors are afraid to "tear up their pants". Of course, some deeper movements in the indices and profit-taking on some stocks immediately after the opening of US stock exchanges are still possible, and it could come ahead of the market's anticipation of these events. So, the stock futures of America could move a little more down too. But it's likely not true that the Fed queered the pitch for investors.

Yes, the Fed predicted that the US economy would shrink by 6.5% in 2020 and unemployment would still be at 9.3% at year’s end. But did anyone optimistically expect an even faster recovery with unemployment in May ranging from 13.7% to 16.7% according to quite official estimates from the Bureau of Labor Statistics? “The Fed met expectations, but at the same time it’s brought the focus back on the economy. There’s also a sense that the rally has gone a bit too far too fast, and while economic numbers have been getting less bad it does not mean that it’s good,” said Moh Siong Sim, FX analyst at the Bank of Singapore.

“Overall, the Fed thinks the road to recovery has begun, but it is a long run. And it is not V-shaped one,” said analysts at Nordea, in a research note to clients. But there is a persistent feeling that this is somewhat at odds with the real situation and with the core sense of Fed's forecasts too. Such statements could only briefly lower the market and then the optimists quickly become very active again, placing their bets to update the historical tops of the S&P500 and European indexes too, following the Nasdaq model. The Fed expects a rebound to begin in early 2021 with economic growth for the next year forecast at 5%.

In fact, the Fed on Wednesday signalled that it does not plan for months but for years of extraordinary support for the economy as the shutdowns to battle a health crisis will echo for years to come rather than be quickly muted as commerce reopens. As Mr Powell said it is now the Fed’s single-minded mission to bring the job market back to where it was at the end of last year with the unemployment rate at a record low 3.5% and wage gains accumulating for some of the very same lower-paid workers in the service sector that have suffered most during the recent collapse. Powell was clearly addressing the recent spotlight on racial inequality and the nationwide demonstrations in the United States.

“Twenty-two, 24 million people - somehow as a country we have to get them back to work,” Powell said during online press conference after the end of the Fed’s latest two-day policy meeting. “They did not do anything wrong. This was a natural disaster. It is a long road. It is going to take some time... we can use our tools to support the labour market and the economy and we can use them until we fully recover,” Powell said. At the median, officials see the unemployment rate falling to 6.5% at the end of 2021 and 5.5% at the end of 2022. The response has been an unparalleled level of unanimity as all 17 current Fed policymakers see the key overnight interest rate remaining near zero through next year, and 15 of 17 see no change through 2022.

At this point “we are not even thinking about thinking about raising rates,” Powell said. And "even in the depths of the 2007-2009 financial crisis and recession some policymakers raised a cautionary flag about the need for higher interest rates to guard against inflation," Howard Schneider and Lindsay Dunsmuir wrote in a Reuters review. Fed officials promised to maintain ongoing Fed bond purchases at least at the current pace of around $80 billion per month in Treasuries and $40 billion per month in agency and mortgage-backed securities - at levels that may be increased later, or complimented with other strategies. This is really great news for stocks, banks and companies with trillions of US Dollars, that is positive for the markets in the middle-term prospects.


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

Material posted here is solely for information purposes and reliance on this may lead to losses. Past performances are not a reliable indicator of future results. Please read our full disclaimer.

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