Macro: Sandcastle economics
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Chief Investment Officer
Summary: The late market rally has extended further overnight in the wake of the US President Trump plan for phased reopening of the US economy, but even more so in late hours on reports that a drug from Gilead has been proving successful in treating Covid19 patients. We look forward to an interesting session ahead of the weekend, particularly for gold prices, as the recent gold narrative has come under pressure.
The market continues to look through terrible data, including yesterday’s US jobless claims and weak Chinese GDP and Retail Sales data, and is trading at new local highs on anticipation of economies reopening and hopes that a new drug treatment will help lift longer term uncertainty about the Covid19 pandemic.
What is our trading focus?
What is going on?
French President Macron sends a loud signal on the EU: In an interview with the FT, Macron loudly criticized the position of the economically stronger EU countries’ response to the Covid19 crisis and demanded that the EU do better. This is an important political signal as we ponder whether the EU is slipping into a new existential crisis:
For Mr Macron, the richer EU members have a special responsibility in the way they deal with this crisis. “We are at a moment of truth, which is to decide whether the European Union is a political project or just a market project. I think it’s a political project . . . We need financial transfers and solidarity, if only so that Europe holds on,” he says.
Covid19: US President Trump unveiled a three phase plan for reopening the US economy that local authorities could employ depending on the severity of local outbreaks of the Covid19 pandemic. Trump claimed as many as 29 states may be ready for Phase 1 within the week, which still only allows gatherings of 10 people or fewer and leaves schools closed. A downward trajectory in cases must be documented for two weeks before starting reopening.
Successful new Covid19 treatment? A report that some Chicago patients were showing rapid recovery from Covid19 symptoms after treatment with a Gilead Sciences drug emerged late yesterday and may have driven the large further rise in equities futures into this morning.
US Minneapolis Fed president Kashkari wrote an op-ed telling banks that suspending dividends and raising equity is the appropriate course of action here. In a day of strong gains for the market, this spooked financial stocks, particularly banks, where share prices dropped across the board.
The latest weekly US jobless claims report showed 5.2 million workers applied for claims for the first time, taking the total beyond 22 million for the past four weeks and estimates circulated that the US April unemployment rate could spike to as high as 20%.
Chinese economy shrank in Q1: China reported a Q1 GDP of -6.8% year-on-year, worse than the -6.0% expected. China’s March Industrial Production was reported down -1.1% year-on-year and Mar. Retail Sales at -15.8%.
What we are watching next?
Gold prices – stocks rallying is one thing, but the massive official response in cutting rates and bringing unprecedented policy support to the economy has seen gold only easing off the highs here. Gold price movements in the coming sessions help tell us whether the macro narrative is really buying into the outlook for normalization, with the first test around 1700 in spot gold now unfolding.
Stock market strength broadening or not? As we discuss above with the strong S&P500 comeback overnight, the broader market has not shown enthusiastic participation in this rally, a situation that needs to change if the rally is to appear more healthy. A bit of extra focus on the worst hit industries as well might be merited today and earlier next week – names like Disney (DIS:xnys), Boeing (BA:xnys) and Marriott Hotels (MAR:xnys), for example.
Natural gas continues to find buyers below $1.60. It bounced strongly on Thursday despite a bigger-than-expected weekly inventory build. The combination of colder-than-normal end of April weather combined with ongoing shut-ins of shale oil wells adding support. Especially the latter need to be watch for signs of bottoming natural gas market.
Economic Calendar (times GMT)
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