The dollar extended its recovery against European currencies this morning, after the big US retail sales beat raised hopes for a speedy economic recovery. The firmer dollar weighed on buck-denominated gold, while stocks and US index futures held onto their gains as central bank stimulus and recovery hopes offset concerns over coronavirus resurgence in Beijing and raised geopolitics risks. Investors also cheered news of a more effective treatment for severe cases: Dexamethasone, which is an inexpensive steroid, has reduced deaths from Covid-19 in UK trials.
US retail sales were undoubtedly really strong, but it bounced back from a very low base as pent up demand was fulfilled with restrictions being eased in some US states and enhanced US unemployment insurance boosted consumer confidence. But this insurance is scheduled to expire at the end of the month and with the impact of government stimulus set to fade, consumer spending will undoubtedly slowdown in the months ahead. So, it remains to be seen how the economic recovery will look like in a few months’ time.
The market has also been increasingly shrugging off the still-rising global cases of coronavirus. It appears as though investors are hopeful that as medical professionals get closer to finding effective treatments and a vaccine for covid-9 patients, that the pandemic might soon be declared over. However, it is far too early, and risks of a second wave is real as we have seen in some US states and in Beijing among other places. With Europe opening up their economies, we could well see an uptick in new cases here too.
But for now, investors aren’t thinking too far ahead, and have evidently been buying every dip knowing full well that the Fed will step in every time there is a stock market sell-off. It is not just the Fed; central banks around the world have been very aggressive in their response to the pandemic and stock market falls. This week for example, the Bank of Japan announced that it will be extending its corporate funding support from $700 billion to $1 trillion.
Indeed, the Bank of England will be meeting on Thursday and given the massive GDP slide in April, speculation is rife that it too will expand its bond buying. If it does, and given the ongoing risk rally as well as renewed optimism over Brexit, the FTSE could hit new highs on the month, having reclaimed its bullish trend line after a brief break down:
The FTSE needs to hold support around 6155-85 area to retain its short-term bullish bias now. It faces some resistance around 6305, which has already been tested twice in as many days. A potential break above here could pave the way towards the levels shown on the chart in red.
