Wall Street opened lower yesterday as investor concerns over rising coronavirus cases had traders worried that new “stay-at-home” orders were on the horizon and that the economy would ultimately suffer. And down the market went, falling over 700 points. It looked like the rout was on. But then word came from the Fed that they would begin buying individual corporate bonds, in addition to those held in ETFs. Under this new program called the Secondary Market Corporate Credit Facility, the Fed will purchase corporate bonds to create a "corporate bond portfolio that is based on a broad, diversified market index of US corporate bonds”, according to a federal reserve press release. And just like that, red turned to green on the big board as the DOW closed up 157 points. As equity markets rise, the USD falls and that again is the case as the USD is lower against both the EUR and GBP while trading somewhat unchanged against the JPY and CAD. DOW Futures this morning are higher as a report from Bloomberg that the Trump administration is preparing a $1 trillion infrastructure proposal that would be aimed at projects such as road and bridge improvement as well as 5G wireless and rural broadband infrastructure. Expect equity markets to open around 400 points higher later his morning. Today, traders will be focused on Fed Chairman Powell’s appearance before Congress. He is scheduled for his semi-annual appearance to testify today and tomorrow on the economy. Needless to say, the actions by the Fed yesterday will certainly be a topic he will be questioned on. US Treasury yields rose overnight as the Fed announcement and the Trump announcement moved debt prices lower. The 10-year note rose to 0.7479% and the 30-year and moved higher to 1.5213%.
EUR/USD is once again trading higher this morning, as traders regain confidence in taking on risk. Technically momentum is turning upward as the moving averages converge and the 50-day MA, looks to cross the 100 and 200-day MA. EUR looks to test resistance at last week’s high. RSI levels are around 57, so their currency is not in an overbought condition. The single currency is also being aided by German ZEW Economic Sentiment which was reported at 63.4 points, beating expectations and last month’s release of 46.0. Europe is feeling extremely optimistic as the ECB has increased its bond-buying, and for the first time, the Coronavirus seems to be under control. As spring turns to summer, there is hope that the tourist season may be salvaged, which would certainly be a boost to the European economies. Suffice to say, any new outbreak would dampen this enthusiasm, but for now, as virus numbers remain low, optimism is prevailing and we could see EUR/USD test new highs.
GBP/USD is trading close to overnight highs this morning as the pound is digesting mixed labor market news, Brexit, and higher virus numbers than other European countries. Technically, the GBP is trading above the moving averages as the 50-day MA looks to cross the longer MAs. If that does not occur, there could be a quick reversal with momentum shifting to the downside. RSI levels are at 68, close to 70, so the currency could be entering an overbought scenario. Economic news did not help cable, as the number of unemployed rose to 528,000 in May, which was worse than expected. April’s number was revised to over 1 million. Wage growth was 1% in April, worse than the 1.4% expected and lower than the 2.3% recorded in March. The online Brexit meeting yesterday seems to have been a non-event with no details provided except that talks will resume on June 29. Lastly, the UK continues to suffer from a high level of coronavirus cases, although they seem to be improving. Poor economic growth and lingering virus cases may begin to weigh on the pound moving forward.
The Bank of Japan kept monetary policy unchanged overnight, which was expected. The short term policy rate remains at -0.1%. The Bank also announced that it will continue to purchase a necessary amount of bonds without setting an upper limit to keep 10-year JGB yields around 0%. In their accompanying statement, the BOJ said the economy is “is likely to remain in a severe situation for the time being" and that CPI will remain negative. In his post-meeting press conference, BOJ Governor Kuroda said it is appropriate to continue aggressive JGB purchases for the time being. He also said the BoJ will maintain its 2% inflation target. The option to lower rates remains a possibility depending on the economy. Technically, the USD/JPY is trading towards the lower end of the overnight range as moving averages are converging. Some safe-haven trading has pushed the currency pair lower, but RSI levels are around the 50-level, indicating some indecision by traders as the North American trading day begins.
USD/CAD is higher this morning after Manufacturing Sales declined more than expected in April, declining by a record 28.5% monthly to C$36.4 billion. This followed March’s decline of 9.2% and came in worse than the expectation of 18.7%. The number was expected to be bad, as April was the first full month of measuring the economy that was affected by the coronavirus. Some manufacturing plants were operating at limited capacity, while others closed completely. Adding to the loonie’s woes, oil prices fell overnight. Meanwhile, virus cases rose overnight, with infections rising in Latin America, the US, and China. Brent crude futures fell $0.20 to $39.52 per barrel, and US West Texas crude fell $0.21 to $36.91 per barrel. As new cases of the virus occur around the world, concerns over fuel demand have caught the attention of traders. Technically, the USD/CAD looks to trade quietly today as MAs are converging. RSI levels are just below 50, so it looks as though traders may want to sell USD/CAD and if the MAs tilt lower, we could see a move lower.
China’s National Health Commission (NHC) has reported 40 new coronavirus infections yesterday, after reporting 49 cases a day earlier. The government has locked down seven compounds in Beijing’s Central Xicheng district. Some bus services have been halted entering Beijing as food markets have been closed as well. Shanghai has reported that they will quarantine all people from mid to high-risk Covid-19 areas in China for 14 days. This new outbreak of viral infections comes after the US is set to allow four flights from China each week. Given the new outbreak of cases, this decision by the US may be tabled for the time being. To improve relations with China, US Secretary of State Mike Pompeo will meet with a Chinese delegate this week in Hawaii. According to Reuters, the meeting will take place on Wednesday and the agenda is likely to include virus response, arms control, trade, Hong Kong, and North Korea.