European Open: Risk-On Stock Rally Hits A Speed Bump
MarketPulse | Feb 05, 2020 03:13AM ET
h3 Is it really so good?/h3
European indices look set for a negative open this morning as the two-day risk rally appears to have run out of steam. The number of reported coronavirus cases globally continues to rise, though again the majority are localized in mainland China. First reports of person-to-person transmission outside of China probably took the edge off risk appetite, to the benefit of gold, the Japanese yen and the U.S. dollar.U.S. indices futures had fallen between 0.24% and 0.29% so far today and the Germany 30 Index was down 0.21% on the day (though all have reversed at time of publication). We are approaching the time when the 14-day isolation period in China from the first lockdown will mature, and markets are monitoring reported totals with an eagle eye. If the escalation doesn’t slow in the next few days, then risk aversion will come to the fore.
h3 SNB hints at rate cut?/h3Swiss National Bank chief Jordan has said that the Swiss franc is “highly valued” (does that mean overvalued?) but added that the central bank has no intention of weakening the local currency to gain an advantage. He did say that there was scope to cut rates further. The next policy meeting of the SNB is not until March 19 and the benchmark rate is currently at -0.75%.
The Swiss franc has been on a weakening path against the U.S. dollar for the past two days, rebounding strongly from near three-week lows. The next technical resistance points could be the 38.2% Fibonacci retracement of the November-January drop at 0.9770 while the 55-day moving average is at 0.9787.
In his State of the Union broadcast, U.S. President Trump said his tariff strategy against China had worked, saying that companies are seen returning to the U.S. He urged bipartisan legislation to cut drug prices while price transparency would reduce healthcare costs.
The address wasn’t without “drama,” with Trump refusing to shake Nancy Pelosi’s hand at the outset, and she subsequently tore up his speech at the end. Impeachment wasn’t mentioned during the address.
h3 RBA’s Lowe sits on the fence/h3RBA Governor Lowe sent mixed messages on the path of Australian interest rates during a speech today. On the one hand he said there was room to cut rates if necessary, but then cautioned that the Bank was close to “crossing point” where rate cuts become a risk. He expressed a desire that rates wouldn’t need to be cut and is hoping for a period of rate stability.
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On the economy, he doubted that Q1 growth would contract due to the coronavirus and the only risk is if the virus is not contained. Q1 growth could take a 0.2% hit due to the wildfires but it is not expected to affect the full year’s data.
Australian yields perked up after the speech with the 3-year yield rising 10 bps to 0.71% while the 10-year yield climbed above the 1% mark for the first time in five days.
The Australian dollar failed to gain any upward momentum from the higher yields, instead falling 0.05% to 0.6735 versus the US dollar. AUD/JPY slid 0.18% to 73.667. The 100-day moving average is above at 74,.307.
Today it’s the turn of the service sector reports on the purchasing managers’ indices. Germany, the Eurozone and the UK all release final readings in Europe. Preliminary estimates were 54.2, 52.2 and 52.9, respectively. Similar data from Markit and ISM feature in the US calendar with 53.2 and 55.0 readings, respectively.
Central bank speeches come from ECB’s De Guindos, Lane and Lagarde, the Fed’s Brainard and the Bank of Canada’s Wilkins.
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