Market Overview

Markets found themselves in a lack of any hints to move higher today. There is just a set of the US Federal Reserve (Fed) speakers due to talk later on on Tuesday, including Raphael Bostic, Randal Quarles, Mary Daly and Thomas Barkin. But the Fed's plans for its quantitative easing (QE) program and forward guidance looks clear and extremely stimulative, so it may not be easy for the markets to pinpoint any new ideas from the words of the U.S. monetary committee members.

The Australian second-most populous state, Victoria, returned to a lockdown across metropolitan Melbourne after a coronavirus outbreak, as the authorities also announced the establishment of a "hard boundary" around Melbourne. "If we were to fail to take those steps, then it won't be a couple of hundred cases per day it will be many more than that and it will quickly spiral well and truly out of control," Daniel Andrews, the premier of Victoria state said. Australia has been one of the least affected countries during the pandemic so far , so that was a disappointing message for the Australian Dollar, causing the Aussie to lose about 60 points of its value. But, as expected, the Reserve Bank of Australia (RBA) held its cash rate at 0.25% and made no changes to its policy during Tuesday's board meeting. RBA reiterated that the Australian economy is performing better than some feared, and gave a clear message that any move higher in the official cash rate is several years away. This stimulating support is very important for the economy.

As for some global market correction, it looks natural, as it is more technical after the record growth of global indexes on Monday. The "traffic jam" may appear on the stairway to heaven just because yesterday's Amazon Co jump above $3050 per share with Google (Alphabet) already at $1495  and Facebook above $240. Apple, Netflix, Tesla and some others closed on new historical highs. All this hiked the bar for the composite indexes to a very high standard for the moment. A pullback on indexes may reflect the readiness for a limited profit-taking, as an average phenomenon in the market, but non necessary with the main drivers, which may be embedded in the intraday expectations.

A small kick down in early Asian hours was prompted by the weak household spending data from Japan for May that showed a severe 16.2% drop year-on-year vs a softer 12.2% decline, which was expected according to the expert polls by Bloomberg. Japanese benchmark Nikkei 225 finished today's trading with a negative -0.44% performance closing at 22,614.6, while Nikkei 225 futures dropped even lower to 22,450 before the European noon. Its South Korea’s Kospi 200 neighbour stock index lost early gains to decline by nearly 1.0%, but Australia’s S&P/ASX 200 index changed very little , edging less than 0.1% lower. 

The main agitator , that is the Chinese continental A50 index, which just made the absolute all-time high on Monday, and opened at +1.87% higher today if compared with yesterday's closing price but then shed more than 2.5% and closed just about 100 basis points (+0,62%) above the previous day levels. Another strong Asian motivator, the Shanghai Composite stock index (SSEC), just quietly gained another 0.37%. There is a feeling as if the markets just need a little more time to get used to these new high levels.

Generous government stimulus, the money being pumped into the economies by all major central banks and hopes for an economic recovery still keep investor sentiment upbeat. Moreover, the American Congress is set to resume talks on the next stimulus bill later this month, while Germany will do its best to cement the structure of a Covid-19 recovery fund in Europe as it now has the six-month rotating presidency of the European Union, and the recovery in German industrial production was less impressive than expected in May. Industrial production in Germany rebounded by 7.8% in monthly calculations after falling by a revised 17.5% in April. However, this recovery was more modest than the approximately ten % rise widely expected. May's output was down by 19% both in calendar and season-adjusted terms compared with February, the month before lockdown measures were imposed.

It's quite possible that the German industrial statistics helped the European markets to sit down a little lower and then wait a bit longer. But the current situation is not new at all, and it is more likely to be perceived as another reason for the introduction of new financial incentives in Europe. Therefore, European markets may have better chances to catch up with their American and Asian "colleagues" soon.

Are there, however, any big fund experts issuing warnings in the midst of a stock rally? Yes, of course. “Investors continue to look past the sustained pickup in new infections in the southern part of the U.S. as well as other parts of the world like Israel, but a sustained influx of downbeat reports could change sentiment,” Prakash Sakpal and Nicholas Mapa, senior economists at ING, said in a report. They added that a fallout from the pandemic has sent financial earnings plunging at many companies, and their recovery is not expected until global consumption picks up.

It is quite clear that the Q2 2020 reporting season that began in July may make adjustments to the cost of individual companies. But potentially weak indicators for the second quarter should be globally taken into account as they are already included in prices, and most market participants are aware of the real depth of the post-quarantine fall. So, most likely they pin their high recovery hopes on the third and fourth quarters. Therefore, the effect of July's reports for the second quarter may be limited, and the summer rally has a good chance to continue.

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