Equities and Commodities Open Week on a Rising Note

May 18, 2020

Share prices in Europe are thus far up 2.4% in the U.K. and France, 2.0% in Spain, 1.4% in Germany and Switzerland, and 1.3% in Italy, and U.S. stock futures also point to a higher open. Earlier today, markets in the Pacific Rim closed down 3.4% in India and 0.7% in Taiwan but up by 1.0% in Australia, 0.6% in Singapore and Hong Kong, 0.5% in Japan and South Korea and 0.2% in China.

The price of West Texas Intermediate crude oil soared 9.2% overnight and is trading above $32.00 for the first time since mid-March. A 1.0% jump in the price of gold wasn’t shabby either and puts such at a 7-year high.

Ten-year sovereign debt yields edged a basis point higher in the United States and are unchanged in Japan. However, significant yield declines have happened in Greece of 7 basis points, Italy of 6 bps, and Spain of 4 bps. Yields are also down 3 bps in Portugal, 2 bps in the U.K., and a single basis point in Germany.

Commodity-sensitive currencies have been well bid this Monday. The dollar dropped 1.2% against the Mexican peso, 0.9% relative to the kiwi, 0.8% vis-a-vis the Australian and 0.5% versus the Canadian dollar. Many provinces in Canada will be observing Victoria Day. Elsewhere, the dollar is unchanged against the euro and Swiss franc and up 0.2% versus the Chinese yuan and 0.1% relative to the yen. Sterling strengthened 0.3%.

Japanese real GDP fell 0.95% on quarter during the first quarter (-3.4% at an annualized rate). That drop was smaller than forecast but nonetheless indicative of the first recession in nearly five years and a severe down-cycle at that. GDP had contracted by an even sharper 7.3% annualized rate in the final quarter of 2019 and was flat in the third quarter. Compared to a year earlier, real GDP was down by 2.0%, its most negative 12-month change since the summer of 2009. Last quarter compared to 4Q19, consumer spending and non-residential business investment declined 2.8% and 2.1%, while residential construction dived 16.7%. Net exports and inventories exerted drags of 0.8 percentage points (ppts) and 0.3 ppts on the GDP growth rate. The GDP price deflator posted a smaller 12-month rate of increase of 0.9%.

Japan’s monthly tertiary index, a measure of service sector activity, slumped in March by 4.2% on month and 5.7% on year. First-quarter changes were -1.2% compared to the final quarter of 2019 and -2.9% versus a year earlier. In 2019, the tertiary index had risen only 0.3% for a second straight year.

The Thailand economy is also in recession. Real GDP there fell 2.2% on quarter and 1.8% on year after the previous quarter’s 0.2% slide. This was the weakest performance in 33 quarters.

So why the market optimism today? There was some encouraging news on the Covid-19 vaccine development front even as reported global cases of 4.82 million thus far edged closer to 5 million and the U.S. death count from the disease reached 90,980. Moreover, more than one central banker indicated a readiness to support growth even more forcefully. Fed Chairman Powell gave an interview on 60 Minutes in which he painted a very weak picture of current U.S. economic conditions but said that there is more support that the central bank can provide and is willing to use. A top official (Haldane) from the Bank of England said the Monetary Policy Committee is considering new options like negative interest rates and a broader asset purchase program, and ECB President Lagarde ramped up the ECB’s commitment to long-term asset purchases.

New Zealand’s services purchasing managers index not surprisingly fell to a record low reading of 25.3 last month from 37.3 in March and 52.0 in February. Scores above 50 imply improving activity and vice versa.

Singapore’s trade surplus narrowed to a two-month low of SGD 2.627 billion in April from SGD 3.183 billion in the prior month.

Property prices in China recorded their smallest 12-month rate of increase in April (5.1%) despite a monthly rise of 0.5%.

The credit agency Fitch downgraded France’s rating outlook to “negative.”

The Conference Board estimates that Britain’s index of leading economic indicators fell 1.3% in March. This compares to earlier reported LEI declines of 6.7% in the United States, 2.7% in Germany and 1.1% in Japan.

The U.S. National Association of Home Builders monthly housing market index will be reported in just under a half hour from now.

Copyright 2020, Larry Greenberg. All rights reserved. No secondary distribution without express permission.

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