It has been a very optimistic start to the new week with stocks, crude oil, copper, gold and silver all pushing higher this morning with the dollar index being flat. Sentiment has been boosted as many European countries including Spain, Italy and the UK reported the lowest number of Covid-19 related deaths for two months at the weekend and as several countries ease lockdown restrictions. Also providing a positive backdrop for risk is ongoing expectations for further policy stimulus, which explains why noninterest-bearish precious metals are rising along with stocks, as long-term government bond yields get depressed. These expectations were encouraged by comments from Federal Reserve Chair Jay Powell late on Friday when he suggested that the central bank was ‘not out of ammunition’ and could do more if needed.
However, while it may be risk on for now, things could turn negative later on today or the week. Renewed macro concerns and/or further escalation in the war of words between the US and China could easily undermine risk appetite. In the slightly longer-term outlook, while central banks and governments will be keen to continue addressing the supply side of the economy, demand from households and businesses could remain soft for a long time given the jump in unemployment across the world. With many countries reopening parts of their economies, there is the additional risk we could see a second wave of the coronavirus spreading.
Consequently, equities remain vulnerable with the crude oil rally also likely to face some resistance amid concerns over weakness of the rebound in demand. But for now, market participants seem to be in the “buy now, ask questions later” mood.
Looking ahead to the week, the key themes driving sentiment will likely be similar to those we have been getting to accustomed to over the preceding weeks. There will be a few important macro pointers to look forward to, with European manufacturing and services PMIs arguably the most important towards the end of Friday. For further details, read our week ahead report
