Two quarters done, two quarters to go. Yesterday, stocks rose to close out a historic second quarter. The past three months were almost a mirror image of the three months that preceded it. Stocks and other risky assets rocketed off their late-March lows, while bond yields remained ultra-low. The Dow Jones Industrial Average had its worst quarter in Q1 2020, down 23.2%. But the index posted its best second-quarter performance since 1938 ending up 17.8%. While coronavirus cases continue to rise in the US and abroad, economic indicators from the two major economies, the US and China keep improving. There is, however, a major concern that the US could lose control of the disease as we head towards the July 4 weekend. Americans are being warned to stay away from crowds in an attempt to stem the tide of viral cases. Yesterday, we saw major rebounds in economic indicators from depressed levels in March and April as the Conference Board reported an 11- point rise in the June consumer confidence index, to 98.1 points, better than economists’ consensus estimate. Also, overnight and less than four hours before the Paycheck Protection Program was scheduled to close with $130 billion still available for loans to small businesses seeking to maintain their payrolls, the Senate approved extending the application period and allowing businesses to receive aid until Aug. 8. The USD begins the new quarter on the uptick against the major currencies, as traders await the US ISM PMI for manufacturing later this morning. This number will let us know just how well the economy is coming back. The expected number is 49.5, just under the expansion level of 50 and an improvement from the previous release of 43.1. FED minutes from the last meeting will also be released this afternoon, and the minutes should include comments from policymakers regarding the economy and the pandemic. DOW Futures were relatively flat overnight, indicating a quiet opening of the equity markets later this morning. US Treasury yields were higher overnight as traders await the release of the economic data. The 10-year note was trading at 0.6824%, while the 30-year bond was trading at 1.4437%. There is a lot of news coming out today and tomorrow, with NFP added to the release of initial jobless claims ahead of the weekend. Geopolitical concerns should keep the USD better bid over the next few days.
EUR/USD is trading just above overnight lows as we begin our trading day. Technical support levels have held for the time being and the moving averages are converging. RSI levels are at 33, nearing the oversold level of 30. The coronavirus seems to be under control in Europe and today is the day that flights from outside the Eurozone will be allowed from other countries including China, but not the US. German retail sales improved to 13.9% in May beating the 3.9% forecast as well as last month’s -6.5%. Eurozone PMI also improved to 47.4 from 39.4. The European Central Bank (ECB) is expanding its balance sheet and injecting liquidity into the system at a frantic pace in a bid to help the economy absorb shocks arising from the coronavirus outbreak. The central bank’s balance sheet has expanded to over 50% of the Eurozone’s gross domestic product (GDP). So with all the “good news”, why hasn’t the EUR advanced? Continuing concern over the US coronavirus and safe-haven purchases of USD has kept a lid on the EUR. Conditions are in place for the single currency to advance and it will as soon as the US gets a hold of their virus outbreak.
GBP/USD is recovering from overnight lows as UK PMI shows a positive level coming in at 50.1 for June after the previous reading of 40.7. Technically the currency has been all over the map overnight, moving from an oversold level early in the trading session to now trading just above the overbought 70 level. Positive comments from Bank of England Chief Economist Haldane that the UK economy is set for a V-shaped recovery help the pound. Also aiding the pound were comments made by the EU’s top Brexit negotiator Michel Barnier. UK Prime Minister Boris Johnson announced plans to revive the UK’s economy, pledging to solve social care issues and educational inequality, while supporting local companies. Some seem to doubt the PM’s plan and the lockdown in Leicester is also weighing on the pound.
USD/JPY is trading near overnight lows this morning despite the poor release of Japanese Tankan numbers. The release overnight showed the Large Manufacturing Index falling to -34 from the previous release of -8, worse than the expected -31. According to a survey conducted from May 28 to June 9, approximately 83% of business enterprises in the manufacturing industry in Japan stated that they already have experienced an impact from the virus on their corporate activities. An additional 15% were concerned about possible impacts in the future. When compared to the last survey, the ratio of affected companies increased by around 10%. Meanwhile, Prime Minister Shinzo Abe plans to roll out a multi-pronged economic stimulus package worth JPY117.1 trillion, which would be the largest in modern Japanese history. It is hoped that this package can stem the damage of the coronavirus. The package will feature universal cash payouts of JPY100,000 per individual and businesses feeling financial strain will be eligible to seek out interest-free loans from public and private lenders.
USD/CAD is trading lower this morning as our neighbors from the north celebrate Canada Day. Today celebrates the anniversary, July 1, 1867, when through a constitutional act, the three separate colonies of the Province of Canada, Nova Scotia and New Brunswick merged into a dominion within the British Empire called Canada. Canada’s birthday is a federal holiday. The “loonie” is higher this morning, as oil prices rose overnight after a report showed inventories in the US fell much more than expected, showing that demand for oil may be improving despite the renewal of the coronavirus around the world. Brent crude futures rose $1.09 to $42.38 per barrel, after declining on Tuesday, while US West Texas crude was up $1.13 to $40.40 per barrel, after also declining on Tuesday. As US inventories fell, the expectations of further usage by consumers would be a definite bullish signal to the oil market and a very positive move for the Canadian Dollar. As the USD/CAD trades near overnight lows, there could be some bounce back as RSI levels are trading around the oversold 30 level.
In China, June Caixin Markit manufacturing PMI rose to 51.2, the highest level since Dec 2019, improving from 50.7 in May, and beating the Reuters poll of 50.5. The report shows China's export orders shrank at a slower pace. However, given that Hong Kong markets were closed for a holiday, the data did not have much impact. Promising economic data from both the US and China lately, have encouraged investors. The new national security law for Hong Kong that was adopted in China on Tuesday gives the government in Beijing sweeping powers to crackdown on dissent. Under the new legislation, many of the protests in Hong Kong that were staged last year would be punishable by law. Overnight, Hong Kong police announced the first arrests under the new law. A man was arrested for holding a Hong Kong Independence flag. The law stipulates “that a person who acts with a view to undermine national unification of Hong Kong with the mainland”, faces punishment of unto lifetime in prison, depending on the severity of the case.