U.S. equity markets suffered their biggest one-day fall in three months yesterday as traders showed concern over the number of coronavirus cases increasing in some states that are reopening from lockdowns. Certain shares that had been on an upswing recently, based on hopes for a smooth reopening of the economy led the declines. The DOW fell 1861 points, the worst trading day since March 16th. Airline stocks and banking stocks were the biggest losers on Thursday. Earlier in the day yesterday, U.S. Initial Unemployment Claims fell to 1.5 million, as the number of people seeking benefits continued to improve. This number was practically ignored as fears of the second wave of the virus have become the most important factor to traders. As the equity market fell, the USD had a better gaining against the major currencies. One trend that remains intact is “DOW up, USD down” and vice versa. As we begin the last trading day of the week, DOW Futures are now showing a decent rise and equity markets are expected to open 600 points higher. Consequently, the USD has moved lower this morning. As traders concern themselves with the possibility that a second wave could affect states re-opening, US Treasury Secretary Steven Mnuchin told Jim Cramer of CNBC yesterday that “the U.S. can’t shut down again”. Many market analysts were expecting some sort of sell-off after the DOW had risen more than 30%, but it seems as the DOW moved lower it gained more momentum than many thought would. Profit-taking is part of trading and if today’s rebound continues, it would not be a surprise. US Treasury yields were higher overnight although traders were still being cautious about the economy. The 10-year was trading at 0.6854%, while the 30-year bond was trading at 1.4296%. This move negates yesterday’s fall of the 10-year to 0.65% and the 30-year to 1.40%. It seems like only a few days ago we were looking at the 10-year breaking through 0.90%.
EUR/USD bounced off trading lows yesterday and seemed to recover after yesterday’s sell-off. Again, profit taking is a large part of the currency's move, given the strong move higher over the last week. Technical momentum remains positive as the single currency is moving back above its moving averages, a bullish sign. As a sign that Europe is moving forward, there was a football match in Seville, Spain yesterday, although no fans were permitted. The European Commission is working to re-open borders and flights, as Germany, Europe’s largest economy is also moving forward with re-opening and encouraging travel. Negotiations in European capitals continue as the EU looks to gain support for their latest fiscal fund, which includes EUR500 billion in grants. As hopes for approval continue this should be a positive sign for the EUR.
GBP/USD is having a tougher time rebounding from yesterday’s sell-off, as traders are concerned over the UK GDP report for April. UK GDP fell by 20.4%, worse than expected, and a horrible number in absolute terms. Manufacturing output fell 24.3%, much worse than the 15% projected. GDP numbers have been weighing on the pound, and the April number doesn’t help. Economists are getting a better picture of how the British economy is reacting to the viral shutdown. While other countries in Europe seem to be returning to “normal”, Great Britain is only gradually loosening restrictions as virus cases fall, but at a very slow pace. PM Johnson continues to receive criticism over his handling of the crisis. The Brexit situation continues to pressure the pound as well, and it is expected that the UK will formally inform the EU that it is unwilling to extend the transition period beyond the end of the year. Technically, momentum has shifted to the downside as the pound is trading below the 50-day moving average. The recent rise from trading lows seems to be a “dead cat bounce”, a trading term for a minor move higher, before the next fall. Look for the pound to end the week on a negative note.
USD/JPY is trading higher this morning, as equity markets seem to be pointing towards a positive day in the US. Japanese economic data released on Friday showed the economy continuing to suffer due to the pandemic. Large Manufacturing Conditions Index fell to -53.2 in the second quarter, after coming in at 17.2 for the first quarter. Industrial Production fell by 9.8% in April and was down by 15%, compared to the last year. Capacity Utilization fell by 13.3%. Technically, the USD/JPY has moved above the 50 and 100-day moving averages and is closing in on resistance levels and the 200-day moving average. After trading most of the morning above the overbought 70-level on the RSI chart, the currency pair has dipped below that level. Finance Minister Taro Aso, in a parliamentary address this morning, stated that Japan’s economy has probably hit bottom and the strength of the recovery would depend not only on domestic demand but on overseas developments as well. The Japanese parliament has approved a second extra budget to fund the coronavirus stimulus package. USD/JPY should end the week higher.
USD/CAD has seen a strong move lower this morning in European trading despite the fall of oil in overnight trading. Failure to break through resistance levels has seen the USD/CAD pullback from two-week highs. The USD/CAD has been trading near the lower end of today’s trading range and has broken below the 50-day moving average. RSI conditions are not yet at an overbought level so there looks to be some further downside possibility for the currency pair. Oil prices were lower overnight, with Brent crude futures down $0.58 to $37.97 per barrel, while the West Texas Intermediate crude fell $0.65 to $35.69 per barrel. The surge in U.S. coronavirus cases has raised the prospect of a second wave which would hurt demand for oil in the U.S. While oil prices are expected to rise, concerns over demand as economies re-open will affect the speed of the move.
China’s Vice Finance Minister Xu Hongcai issued a statement on Friday that said “fiscal funds have been increased for local governments, which will help support employment, and expand consumption and investment”. He also said that these funds will be used to support firms and residents having difficulties. The US and China remain at odds, as China’s Global Times continues to criticize Trump and the administration officials. Adding to the tension is China’s continued problems with Australia and the UK.